Indirect Rollovers Can Be Complicated To Manage
With an indirect rollover, you receive a check for the balance of your account that is made payable to you. That might sound good, but as a result, you are now responsible for getting it to the right place. You have 60 days to complete the rollover process of moving these assets to your new employer’s plan or an IRA.
If you dont complete the rollover within this 60-day window, you will owe income taxes on the amount you failed to roll over. If you’re under 59 1/2, you will also face a 10% penalty tax. Indirect rollovers can be made once a year.
Your old employer is required to withhold 20% from your distribution for federal income tax purposes. To avoid being taxed and penalized on this 20%, you must be able to get enough money from other sources to cover this amount and include it with your rollover contribution.
Then, youll have to wait until the following year, when you can file your income tax return to actually get the withheld amount back.
Suppose the 401 or 403 from your prior employer has a balance of $100,000. If you decide to take a full distribution from that account, your prior employer must withhold 20%. That means they keep $20,000 and send you a check for the remaining $80,000.
Even if you have an extra $20,000 on hand, you still must wait until you file your income tax return to get the withheld $20,000 returnedor a portion of it, depending on what other taxes you owe and any other amounts withheld.
How To Get Emergency Cash From Your 401 And Keep On Investing
With a partial cash withdrawal, you would first roll all of your 401 funds into an IRA. By leaving part of your funds in a cash position within the IRA, you have cash as needed. Meanwhile, you can invest the remainder as per your retirement strategy. Its really an option of last resort. However, a partial approach makes the most of a dire situation, says Markwell.
No matter what options you consider or eventually choose, Markwell has this advice to offer: One of the advantages of working with a financial advisor during a career transition is that you can reduce your stress level and emotions, says Markwell. And with a clearer head, you can make decisions that will help in putting you on a more solid track to a successful retirement when the time comes.
What To Do With Your 401 Money When You Retire
By Rodney Brooks, Next Avenue Contributor
Billions of dollars are at stake as boomers decide what to do with the $5.3 trillion theyve invested in company-sponsored 401 plans when they retire. Leave the money where it is? Roll it over to an Individual Retirement Account at a financial firm? For many, its a head-scratcher.
The topic is especially timely with the Wall Street Journal recently reporting that the U.S. Department of Labor is looking into whether Wells Fargo has been pushing retiring clients to move their 401 money into more expensive IRAs at the bank.
Financial advisers say there are pros and cons to leaving your 401 in place and to rolling it over into an IRA.
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It depends on the individual needs of the employee and the quality of the plan, says Harris Nydick co-founder of CFS Investment Advisory Services in Totowa, N.J., and author of Common Financial Sense, Simple Strategies for Successful 401 and 403 Retirement Plan Investing.
There is not a one-size-fits-all when it comes to making this decision, says Dan Houston, chairman, president and CEO of Principal Financial Group in Des Moines,
5 Reasons to Leave your 401 With Your Company
Here are five reasons to consider leaving your 401 with your company as 22% of 401 owners did when exiting, according to an Ameritrade survey rather than moving it to a Rollover IRA when you retire:
5 Reasons to Roll Over Your 401 Into an IRA
What Not to Do With Your 401
Also Check: What Is A Traditional Ira Vs 401k
Breaking It Down: Where Do You Fit In
There are many reasons you might think this chart seems totally reasonable, or, conversely, totally unreasonable. And thats understandable. Life presents us all with different challenges. We have unexpected medical expenses, decide to go back to school, or have kids and want to pay their college tuitions. These are all perfectly valid excuses as to why you might be falling behind where this chart says you should, or could, be.
Based on this chart, you would think that most Americans should be retiring as multi-millionaires at age 65. This probably seems way off-base, and in reality, it is most people retire with very little in the way of savings and investments. The point is that this chart shows what is possible if you are disciplined and strategic about your 401k savings.
If you are on the younger end of the ages shown on the chart, you may be daunted at the prospect of contributing $8,000 per year to your 401k, not to mention $19,500. Where you live, what your first-year salary is, or what loans you may be paying can make it difficult for this contribution to seem realistic. Its crucial, however, to recognize the importance of saving as much as you can for retirement as early as you can.
So, lets determine, based on the two scenarios in the potential savings chart, whether these figures would be sufficient to support your lifestyle for the rest of your retirement.The average life expectancy for men is around 84 years old, and 86.5 years old for women.
Organize A Charity Drive
Make a real difference in your community by leading a project to help others. Enlist family, friends, club members, former colleagues, and anyone else who can contribute to your efforts. Talk to local charities to see what’s needed most. You might consider collecting clothing for disaster victims, raising money for a special needs group, or gathering toys for sick children.
Recommended Reading: How To Move A 401k To A Roth Ira
How The Rollover Is Done Is Important Too
Whether you pick an IRA for your rollover or choose to go with your new employer’s plan, consider a direct rolloverthats when one financial institution sends a check directly to the other financial institution. The check would be made out to the bank or brokerage firm with instructions to roll the money into your IRA or 401.
The alternative, having a check made payable to you, is not a good option in this case. If the check is made payable directly to you, your employer is required by the IRS to withhold 20% for taxes. As if that wouldn’t be bad enoughyou only have 60 days from the time of a withdrawal to put the money back into a tax-advantaged account like a 401 or IRA. That means if you want the full value of your former account to stay in the tax-advantaged confines of a retirement account, you’d have to come up with the 20% that was withheld and put it into your new account.
If you’re not able to make up the 20%, not only will you lose the potential tax-free or tax-deferred growth on that money but you may also owe a 10% penalty if you’re under age 59½ because the IRS would consider the tax withholding an early withdrawal from your account. So, to make a long story short, do pay attention to the details when rolling over your 401.
What Do I Do With My 401k When I Retire
If you recently retired, you should figure out what to do with the 401 money. Here are some ideas on what you can do with your retirement savings.
Over your working years, youâve diligently contributed to your 401 retirement account. Now that you are retired, what do you do with the money? A recent study by Cerulli Associates revealed that most people approaching retirement are not sure what to do with their retirement money.
Once you have retired, you can opt to leave the 401 behind, rollover the 401 to an IRA, or start taking distributions. You must be age 59 ½ or older to start taking distributions without penalty from IRS, or 72 to start taking required minimum distributions. If you are 55 when you retire, you can withdraw money from your current 401 without paying an early withdrawal penalty. However, this rule of 55 does not apply to your previous 401s.
Read Also: How To Open A Self Directed 401k
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3. Social Security will be a bigger portion of your income than you think.
The average retiree withdraws about 3-5% from their retirement assets such as stocks, IRAs and 401 plans every year. During pre-retirement planning, investments like these are how they imagine theyll fund their lives in retirement.
What many people forget is that Social Security makes up a large chunk of what most retirees spend in retirement. Quietly over time, youve probably amassed an impressive Social Security account that will add a strong dose of income to your retirement.
4. How long will you live?
Unfortunately, in the math of retirement, the big unknown is how long youre going to live. Right now, the average life expectancy in the United States is about 77 years. That being said, the very last thing you want to do is outlive your money. I always plan for my clients to live to 90 or even 95, just in case. If you die earlier than that, then you leave some money to your heirs. Thats certainly a better option than outliving your money and depending on the kindness of your children, or the government, to support you in old age.
5. Plan for unexpected costs.
Your costs will change as you retire. You wont be saving for retirement anymore, and you may also save on other costs if youre no longer paying a mortgage, commuting, sponsoring business lunches, etc. That leaves you with extra room in your budget.
6. Remember required minimum distributions.
Examine Benefit End Dates
Some benefits may stop the day youre done with work, but others may extend by a set number of days. However, those benefits arent as common as they used to be, says Winston.
This list can help in the retiring transition:
- Upcoming checkups: If you have dental or vision insurance now but wont when you retire, schedule appointments before your last day while those expenses may still be covered.
- Life insurance extension: To convert a voluntary life insurance policy , contact your benefits administrator to get the paperwork started. The difference: Youll pay the premium directly to the insurance company, rather than having it payroll deducted.
- Health insurance and retirement: More on those topics below.
Tip: Enter your employee benefits or human resources department into the contacts on your phone in case you have questions once youre retired.
Recommended Reading: Which Is Better 401k Or Ira
Leave It With Your Former Employer
If you have more than $5,000 invested in your 401, most plans allow you to leave it where it is after you separate from your employer. If it is under $1,000, the company can force out the money by issuing you a check, says Bonnie Yam, CFA, CFP, CLU, ChFC, RICP, EA, CVA, and CEPA for Pension Maxima Investment Advisory Inc. in White Plains, N.Y. If it is between $1,000 and $5,000, the company must help you set up an IRA to host the money if they are forcing you out.
If you have a substantial amount saved and like your plan portfolio, then leaving your 401 with a previous employer may be a good idea. If you are likely to forget about the account or are not particularly impressed with the plans investment options or fees, consider some of the other options.
When you leave your job and you have a 401 plan which is administered by your employer, you have the default option of doing nothing and continuing to manage the money as you had been doing previously, says Steven Jon Kaplan, CEO of True Contrarian Investments LLC in Kearny, N.J. However, this is usually not a good idea, because these plans have very limited choices as compared with the IRA offerings available with most brokers.
If you leave your 401 with your old employer, you will no longer be allowed to make contributions to the plan.
Reasons To Contribute To A 401
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If youre employed with a company that offers a 401 plan and you are not participating, reconsider! Consistently contributing to a 401 throughout your working years can help create a secure retirement.
Its not as difficult as you think: Lets say youre starting now at age 25 and your annual salary is $50,000. If you contribute ten percent of your earnings consistently, receive a three percent raise each year and earn an eight percent rate of return on your investment, you could have more than $2 million in your 401 by the time you retire at 65!1
Depending on your employers tax status, your plan may be called 403 or 457. Both are similar to a 401 in how they benefit you.
There are other financial tools available you can use to prepare for retirement, but 401s offer many advantages that other savings and investment vehicles dont. Here are three of them.
1. 401 contributions are before tax money
The amount you choose to contribute to your 401 is deducted from your paycheck before taxes are taken out. As a result, youre paying taxes on a smaller portion of your salary and your overall tax rate may be lower.
2. When you finally pay taxes on your 401, it may be at a lower rate
Recommended Reading: How Should I Invest My 401k
How A Roth Ira Conversion Can Leverage Currently Low Tax Rates
One of the potentially overlooked silver linings of the past years economic challenges is a favorable income tax environment created by the 2017 Tax Cuts and Jobs Act. If youre considering a Roth IRA conversion1 from your 401, youll be paying some of the lowest tax rates in history on those converted assets and doing it all at one time. However, if you went with a traditional IRA rollover, you may pay higher taxes in retirement on your RMDs.
If youve lost your job, or your income level drops, you can convert your 401 assets at your new, lower, tax bracket. Say, for example, you convert your 401 assets to a Roth IRA, you may be paying taxes at a reduced rate right off the bat, explains Markwell. And if taxes rise between now and your retirement target date, at which time youd otherwise take distributions, you will have further benefited tax-wise from that earlier conversion.
Keep in mind that establishing an IRA with efficient growth goals may call for more active management on your part, depending on your retirement goals. A financial professional can help tailor your investments to your individual strategy and also help you revisit and refine that plan as needed.
Things You Need To Do No Matter What
If youre 10 years or so from retirement, chances are youre in your 50s. If thats the case, then there are some specific steps you need to take no matter how much money you have in your retirement account.
1. Check in with your dream team. By now, you need to have your dream team in placethat group of professionals who are helping you grow and protect your wealth and your legacy. Now is a good time to check in with them. Your estate plan or will may need to be updated. You need to check in on the tax implications of your investments. You need to evaluate your insurance. Its time to huddle together and get a game plan for the coming years.
2. Learn about and sign up for Medicare. Its a confusing program , so being informed is crucial! If you turn 65 in the next 10 years, learning about it should be on the top of your list. There are some rules about sign-ups around your 65th birthday, so make sure to read that section carefully. Be sure to get in touch with your private health insurance administrator before you start the enrollment process.
3. Check into your Social Security benefits. The Social Security Administration has an online tool that estimates how much money youll get each month when you apply for Social Security retirement benefits. This number may change a little, but knowing the amount is helpful when planning a monthly budget. Remember, though, this money is icing on the cake. Dont rely on it as your sole source of income in retirement.
Read Also: Can I Rollover Current Employer 401k To Ira
How To Start Saving For Retirement
While starting early is always important even $25 a month in your 20s is helpful it’s OK to set money aside for more immediate needs first and then start tackling retirement in your late 30s and early 40s. However, you don’t want to wait much beyond that because you’ll need time to put money into a retirement account for that money to grow. The longer you wait the more you’ll have to sock away yearly making the challenge a lot more difficult.
Enroll In A Retirement Plan
Enrolling in a retirement plan is one of the best things you can do for your future, and as discussed, the earlier you start, the better. An employer-sponsored 401 is a great option for many employees. If you havent done it before, it may feel a little overwhelming, but taking a few simple steps will get you started.
Read Also: How Much Is The Max You Can Contribute To 401k
