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What Determines Your Social Security Benefit
Your Social Security benefit amount is largely determined by how much you earned during your working years, your age when you retire, and your expected lifespan.
The first factor that influences your benefit amount is the average amount that you earned while working. Essentially, the more you earned, the higher your benefits will be. The SSA’s annual fact sheet shows workers retiring at full retirement age can receive a maximum benefit amount of $3,148 for 2021, and $3,345 for 2022. The Social Security Administration calculates an average monthly benefit amount based on your average income and the number of years you are expected to live.
In addition to these factors, your age when you retire also plays a crucial role in determining your benefit amount. While you can begin receiving Social Security benefits as early as age 62, your benefit amount is reduced for each month that you begin collecting before your full retirement age. The full retirement age is 66 and 10 months for those who turn 62 in 2021. It increases by two months each year until it hits the current full retirement age cap of 67 for anyone born in 1960 or later.
To ensure benefits maintain their buying power, the Social Security administration adjusts them every year in accordance with changes in the cost of living. For example, as of January 2022, the COLA will cause Social Security and Supplemental Security Income benefits to increase by 5.9%.
Making A Choice For Your 401
Maybe youve switched jobs to take on new challenges. Perhaps youre thinking about changing career paths for something more rewarding. Or maybe youre finally getting ready to retire.
We understand when your life changes, other things may change toolike your goals for retirement. Well help you consider your options for your 401 accounts from past jobs, so you can feel confident youre on track for the future you want.
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The Benefits Of Contributing To Your 401 Account
401s sit within a certain class of accounts specifically designed for stashing away money for the long term to be eventually used in retirement. Other types of retirement accounts include IRAs, Roth IRAs, Roth 401s, and 457s, but for the sake of this article, well keep our focus on 401s .
Because 401 accounts were created with saving for retirement in mind, they offer certain advantages over other types of accounts that are designed to help the money you contribute to them grow more quickly over time. Here are a few of those advantages.
What Happens To Your 401 After You Leave A Job
It’s becoming increasingly common for professionals to switch jobs several times throughout their working careers, meaning that most people have to decide what to do with 401 after leaving the job. When you switch jobs or get laid off, you have to evaluate your options on what do you with your 401 account.
After leaving your current job, you have up to 60 days to decide what happens to your retirement savings. Otherwise, your savings will be automatically transferred to another retirement account. In most cases, employers have clear guidelines indicating what you can do with your 401.
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Taxation On Retirement: How Will My Withdrawal Be Taxed If I Live In My Home Country
There are 2 options that you have after reaching the age of 59½. You can take your 401 and IRA Distributions either as a lump sum distribution or as monthly pension. Now, both of these mediums have different tax implications. Lets understand them one by one.
- Lump Sum Distribution: For a non-resident alien, the brokerage will withhold 30% from the proceeds. You can however be eligible for a reduced rate if your home country has a treaty with the USA . This withheld tax will be used to settle your actual tax due in the US. Now, simply put, if the tax amount is greater than the amount withheld, youll have to pay the balance or you can file form 1040-NR to claim a refund vice versa
Note: In the case of the USA, once you have moved to your home country, you will only pay US taxes on US-Situs assets if you are a non-resident. Thus, if distributions are small, you could fall into the lowest US bracket and essentially pay 0%. Also, if your worldwide income is taxed in your home country then this amount must be added to your gross income . The DTAA also comes into play here.
- Monthly Pension: Now, primarily the brokerage has to withhold 30% from the monthly distributions if theres no taxation treaty signed between the home country and USA. However, in case of India, there is a DTAA signed with the USA that dictates that youll only pay the taxes on your 401 pension in India . However, you are still required to file the tax returns in the USA.
Best Places For Employee Benefits
SmartAssets interactive map highlights the counties across the country that are best for employee benefits. Zoom between states and the national map to see data points for each region, or look specifically at one of four factors driving our analysis: unemployment rate, percentage of residents contributing to retirement accounts, cost of living and percentage of the population with health insurance.
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The Boring Glory Of Index Funds
Your best bet is to buy something called an index fund and keep it forever. Index funds buy every stock or bond in a particular category or market. The advantage is that you know youll be capturing all of the returns available in, say, big American stocks or bonds in emerging markets.
And yes, buying index funds is boring: You usually wont see enormous day-to-day swings in prices the same way you may if you owned Apple stock. But those big swings come with powerful feelings of greed, fear and regret, and those feelings may cause you to buy or sell your investments at the worst possible time. So best to avoid the emotional tumult by touching your investments
Calculate Your Plan Fees
Find out what fees you are paying as part of your plan. You can ask your employer what those are. Use this information to calculate how much these fees are costing you on an annual basis. Investment, administrative, and other plan fees should ideally hover around 0.2%. You may want to consider getting your plan funds or transitioning to an alternative retirement savings option if the fees approach 1%.
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How Much Of My Salary Can I Contribute To A 401 Plan
The amount that employees can contribute to their 401 Plan is adjusted each year to keep pace with inflation. In 2021, the limit is $19,500 per year for workers under age 50 and $26,000 for those aged 50 and above. In 2022, the limit is $20,500 per year for workers under age 50 and $26,500 for those aged 50 and above.If the employee also benefits from matching contributions from their employer, the combined contribution from both the employee and the employer is capped at the lesser of $58,000 in 2021 or 100% of the employees compensation for the year .
Dont Panic And Withdraw Your Money Early
Surrendering to the fear and panic that a market crash elicits can cost you. Withdrawing money from a 401 before age 59½ can result in a 10% penalty on top of normal income taxes. Its especially important for younger workers to ride out the market lows and reap the rewards of the future recovery.
Even people nearing retirement age may rebound from the crash in time for their first withdrawal. Consider the coronavirus-fueled crash of 2020 as a case study. The Dow Jones Industrial Average, which notched an all-time high of 29,551.42 on Feb. 12, 2020, fell to just above 19,000 by March 15, 2020. Then on April 15, 2021, it posted an intraday high of more than 34,000. Spooked investors who pulled their money from the market in March 2020 missed out on the bull market that pushed the DJIA to record highs by November 2020 just eight months later.
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Leave Your 401 With The Old Employer
In many cases, employers will permit a departing employee to keep a 401 account in their old plan indefinitely, although the employee can’t make any further contributions to it. This generally applies to accounts worth at least $5,000. In the case of smaller accounts, the employer may give the employee no choice but to move the money elsewhere.
Leaving 401 money where it is can make sense if the old employer’s plan is well managed and the employee is satisfied with the investment choices it offers. The danger is that employees who change jobs over the course of their careers can leave a trail of old 401 plans and may forget about one or more of them. Their heirs might also be unaware of the existence of the accounts.
Eventually You Must Withdraw Money From A 401
Uncle Sam won’t let you keep money in the 401 tax shelter forever. As with IRAs, 401s have required minimum distributions. You must take your first RMD by April 1 in the year after you turn 72. You will have to calculate an RMD for each old 401 you own. Once you’ve determined the RMD, the money must then be withdrawn separately from each 401. Note that unlike Roth IRAs, Roth 401s do have mandatory distributions starting at age 72.
If you hit that magic age, you are still working, and you don’t own 5% or more of the company, you don’t have to take an RMD from your current employer’s 401. And if you want to hold off on RMDs from old 401s and IRAs, you could consider rolling all those assets into your current employer’s 401 plan.
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You Will Be Taxed On 401 Distributions
Traditional 401 contributions are often made on a pretax basis, which means they lower your taxable income during your working years.
Because the money wasnât taxed when you contributed it, when you begin taking distributions from your 401, youâll have to pay tax because the IRS treats this money as ordinary income. That means you wonât get to keep everything youâve saved. And if you withdraw too much in a given year, you could push yourself into a higher tax bracket â meaning the government will take a larger portion of your savings.
While you will owe income tax on money that you withdraw from a traditional 401, you will not owe tax on money that you have saved in a Roth 401. If your savings is in a traditional account, itâs possible to do a Roth conversion, where you will owe income tax on the amount you convert in the year that you convert it. With a Roth IRA, you can enjoy tax-free distributions in retirement.
So how does a 401 work in retirement? While it can be rolled to an IRA, ultimately itâs up to you and how you want to use your lifetime of savings to generate the income you need to fund the things youâve been dreaming about for your retirement. An experienced financial advisor who understands the ins and outs of retirement income and tax planning can help.
There Are Contribution Limits For 401s
The IRS sets an annual limit on how much money you can set aside in a 401. That limit can change because it is adjusted for inflation. For 2021, you can put away $19,500. Those 50 or older by year-end can contribute an extra $6,500. Check out the Financial Industry Regulatory Authority’s 401 Save the Max Calculator, which will tell you how much you need to save each pay period to max out your annual contribution to your 401. If you cannot afford to contribute the maximum, try to contribute at least enough to take full advantage of an employer match .
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Review Your Named Beneficiary Designations
A new change in the law makes it extra important to plan for your beneficiaries especially if you have heavyweight assets.
Investors saving towards retirement or those who are already in retirement should know that the recently-passed SECURE Act has changed laws regarding distribution options for named beneficiaries on retirement accounts, said Leslie Geller, a wealth strategist at Capital Group. Beyond ensuring that you have named beneficiaries, now is the time to review those designations because of the new 10-year distribution rule for inherited IRAs applicable to most non-spousal beneficiaries. This is especially relevant for investors who have significant retirement assets.
Option : Keep Your Savings With Your Previous Employers Plan
If your previous employers 401 allows you to maintain your account and you are happy with the plans investment options, you can leave it. This might be the most convenient choice, but you should still evaluate your options. Each year, American workers manage to lose track of billions of dollars in old retirement savings accounts, so you should make sure to track your account regularly, review your investments as part of your overall portfolio and keep the beneficiaries up to date.
Some things to think about if youre considering keeping your money in your previous employers plan:
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Roll It Over To Your New Employer
If youve switched jobs, see if your new employer offers a 401, when you are eligible to participate, and if it allows rollovers. Many employers require new employees to put in a certain number of days of service before they can enroll in a retirement savings plan. Make sure that your new 401 account is active and ready to receive contributions before you roll over your old account.
Once you are enrolled in a plan with your new employer, its simple to roll over your old 401. You can elect to have the administrator of the old plan deposit the balance of your account directly into the new plan by simply filling out some paperwork. This is called a direct transfer, made from custodian to custodian, and it saves you any risk of owing taxes or missing a deadline.
Alternatively, you can elect to have the balance of your old account distributed to you in the form of a check, which is called an indirect rollover. You must deposit the funds into your new 401 within 60 days to avoid paying income tax on the entire balance and an additional 10% penalty for early withdrawal if youre younger than age 59½. A major drawback of an indirect rollover is that your old employer is required to withhold 20% of it for federal income tax purposesand possibly state taxes as well.
Option : Roll Over Your Old 401 Into An Individual Retirement Account
Still another option is to roll over your old 401 into an IRA. The primary benefit of an IRA rollover is having access to a wider range of investment options, since youll be in control of your retirement savings rather than a participant in an employers plan. Depending on what you invest in, a rollover can also save you money from management and administrative fees, costs that can eat into investment returns over time. If you decide to roll over an old 401 into an IRA, you will have several options, each of which has different tax implications.
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Should You Open An Ira With Your 401
Another option and one that almost 90% of all 401 plan participants choose is to open an individual retirement account . Many investors receive very aggressive and hard sales pitches to try and encourage them to rollover their 401 plans to IRAs. In addition, a transfer to an IRA is often a quicker and slightly easier process of moving your retirement account out of the clutches of your former employer. A traditional IRA will still carry the same tax characteristics with the funds being tax deferred until you withdraw the account during retirement.
Related Article: IRA vs. 401
There are a few drawbacks of IRAs versus 401 plans that employees should be aware of when rolling over their retirement funds. IRAs often have a higher cost than many employer sponsored 401 retirement plans. Additionally, IRAs often require more investment knowledge and involvement by the investor than a 401 plan.