You Can Take It With You
Even if you change jobs, the money youve contributed to your 401 and its earnings belong to you. Depending on your plan type, there are different ways to keep your retirement plan invested and growing on a tax-deferred basis. If youve left an employer, but still have an old 401 with them, find out what your options are for leaving it in plan or moving it somewhere else.
Wait Where Did My 401 Account Go
American workers could be losing a collective $2 trillion in lost retirement savings simply by not rolling over their 401 savings accounts when they change jobs.
A practice referred to as forced transfers or forced rollovers is the reason for much of these losses, according to the Employee Benefit Research Institute.
Unlike many other countries, the United States doesnt have a centralized pension database that keeps track of workers defined-contribution retirement accounts or a standardized, centralized mechanism by which workers can easily roll over a 401 into their new employers plan when they change jobs. As a result, their account often gets left behind and thats where the problem begins.
How To Invest Your 401
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list ofour partnersandhere’s how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.
Nothing is more central to your retirement plan than your 401. It represents the largest chunk of most retirement nest eggs.
Finding the money to save in the account is just step one. Step two is investing it, and thats one place where people get tripped up: According to a 2014 Charles Schwab survey, more than half of 401 plan owners wish it were easier to choose the right investments.
Heres what you need to know about investing your 401.
Read Also: How To Find Out Where Your 401k Is
What Happens To Your 401 When You Leave Your Job
You basically have four options when you leave your job: Do nothing and leave the money in your old 401, roll it over into an IRA, roll it into your new employers 401 plan, or cash out your 401.
Lets get this out of the way: Do not cash out your 401plan. Bad idea! Heres why: When you cash out your 401, you dont even get to keep all of the money! Youll owe taxes on the total amount as well as a 10% withdrawal penalty.
Lets say youre in the 24% tax bracket and decide to cash out the $10,000 you have in your 401 plan when you leave your job. Even though you started with $10,000 in your 401, youll be left with only $6,600 after taxes and penalties.
Your best option is to roll over your 401 funds into an IRA because it gives you the most control over your investments and what mutual funds to choose from.
If you rolled that $10,000 over to an IRA and let it grow for 30 years, it could be worth about $267,000! Even a small cash-out has a big impact on your savings. Your financial advisor can help you roll over any old 401s so you get the most out of your investment.
How Much Should You Invest In Your 401
If your employer offers a match, you should at least invest enough to take full advantage of that perk. Dont say no to free money!
The good news is the vast majority of companies with a 401 plan provide a match on employee contributions.2 And the average employer match is around 4.5% of your salary.3 Even if your employer match is less than that, that extra money can make a big difference in your nest egg over time.
After you take advantage of the match, then what? Overall, we recommend that you save 15% of your income toward retirement. But does all of that need to be in your 401? Not necessarily. Here are a couple options:
- Option #1: You have a Roth 401 with great mutual fund choices. Good news! You can invest your whole 15% in your Roth 401 if you like your plans investment options.
- Option #2: You have a traditional 401. Invest up to the match, then contribute whats left of your 15% to a Roth IRA. Your financial advisor can help you get one started! If you contribute the maximum to your Roth IRA and still have money left over, you can go back to your traditional 401.
The most important factor in having a secure retirement is contributing consistently into your 401 over the long haul.
Recommended Reading: Can A Sole Proprietor Have A 401k
The Risk Of Losing It All
Also, 401k funds are yours, and will be yours even if the managing company goes bankrupt. Make sure that this is still true if you roll it over to that insurance company. Since they are offering a 11% bonus, I have a feeling that theres something fishy behind this. Remember, companies and salespeople are out there to make money. Never trust them when they say they want to help you, because its simply not true 99% of the time.
The bottom line is that at first glance, 11% is a huge bonus. In 14 years though, and the incentive becomes minimal. Do your due diligence and make sure you know EVERYTHING. If you are uncomfortable knowing everything you need to ask, I would skip this offer. As the old saying goes, when its too good to be true, its usually bad.
What’s The Best Choice For You
The best action for your 401 depends on you, and there isn’t just one right answer. I generally advise against taking a lump sum distribution unless you have a small amount of money in the plan. Meanwhile, putting all of your money into an annuity is usually not a good idea, but going this route with some of your 401 may not be the worst idea.
Finally, the best move for you might be a combination of a few of these options. For example, maybe you could take some of the money out right away to cover expenses and treat yourself, use some to buy a deferred-income annuity, and roll the rest into an IRA. The point is that there isn’t a one-size-fits-all answer to the question of what to do with your 401, so it’s important to weigh the pros and cons of each option and make the best decision for you.
Recommended Reading: What Is A 401k Profit Sharing Plan
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 rollover an old 401 into an IRA, you will have several options, each of which has different tax implications.
Do Not Miss: Steps To Build Portfolio For Early Retirement
Rental property could be a stable source of retirement income as it is also a sort of long-term investment.
It is feasible for those who think investment property is a real-time business and can sacrifice time for it having some degree of real estate experience.
The rental property comes with unexpected expenses, including maintenance costs. One should take into account all the potential costs that may arise over the time frame one intends to own the investment property.
It is pertinent to mention that one must also consider the vacancy rates on these rental properties. As not all properties are 100 per cent occupied all the time.
It is an investment company that raises funds through an initial public offering and offers shares on the stock market for trade.
The money doesnt flow in and out instead the fund is built to produce quarterly or monthly income. This income comes from dividends, interest or return of principal in certain circumstances.
Each fund is built with a different objective.
Few close-end funds use leverage and are able to pay a higher yield as they borrow against the underlying securities to buy more income-producing securities. Leverage means additional risk and one must acknowledge the fact the funds principal value tend to be volatile.
You May Like: Can 401k Be Transferred To Roth Ira
Investing In Your 401
The variety of investments available in your 401 will depend on who your plan provider is and the choices your plan sponsor makes. Getting to know the different types of investments will help you create a portfolio that best suits your long-term financial needs.
Among the most importantand perhaps intimidatingdecisions you must make when you participate in a 401 plan is how to invest the money you’re contributing to your account. The investment portfolio you choose determines the rate at which your account has the potential to grow, and the income that you’ll be able to withdraw after you retire.
What To Consider When Choosing A Broker
If youre planning to roll over your 401 into an IRA, youll likely be most concerned with a broker that can do the following things best. Most brokers do offer an IRA, but some popular ones do not, but the brokers below all offer IRAs. We also considered the following factors when selecting the top places for your 401 rollover.
- Price: Trading commissions for stocks and ETFs have fallen to $0 at most online brokers, and thats great for investors. But there are other costs, too, perhaps most notably account fees, such as fees for transferring out of your account.
- No-transaction-fee mutual funds: The brokers in the list below offer thousands of mutual funds without a transaction fee. If youre rolling over your 401 and you like the mutual funds you have already, these brokers may allow you to buy and sell the same one without a fee.
- Investing strategy: While a 401 may limit your investing options to a pre-selected group of mutual funds, an IRA gives you the ability to invest in almost anything trading in the market. So we considered how each broker might fit an investors needs.
You May Like: When Leaving A Job What To Do With 401k
How Does A 401 Work
Eligibility to participate in your company 401 usually involves a minimum employment period. Many employers allow you to participate in the 401 within a month or two of your hire date.
The amount you deposit into your 401 with each paycheck is calculated from your contribution rate. Your contribution rate is the percentage of your salary you will contribute. Say you make $45,000 annually, or $3,750 gross monthly. A 10% contribution rate would mean you contribute $375 from your monthly paycheck towards this retirement plan.
Don’t panic if that seems like too much money to carve out of your income. Thanks to the 401’s tax advantages, a $375 paycheck deferral will cost you something less than $375. The contributions from your paycheck are tax-deductible. Known as paycheck deferrals, these amounts are taken from your pay before income taxes are applied. That lowers your taxable income, which, in turn, reduces your income taxes.
Some 401 plans offer matching contributions, also known as an employer match. These are deposits to your 401 account that are funded by your employer — basically free money. Matching contributions follow a formula that your employer defines. A common structure is for the employer to deposit $0.50 for every $1 you contribute, up to 6% of your salary.
Guaranteed Income For Life May Not Be As Good As It Seems
One fairly popular option is to use the money to purchase an annuity, which basically means you’ll receive a steady stream of income for the rest of your life in exchange for a large payment now.
Obviously, the upside to this is that you’ll have a steady “paycheck” for as long as you live, and there is zero chance that you will outlive your money. There are several options when choosing annuities, including options that guarantee payments to your spouse or heirs if you die before a certain time. Here’s a primer on annuities to help you get started if you want more information.
The major downside to an annuity is inflation. In other words, the payments you receive from the annuity will be worth less and less as time goes on. For example, if you buy an annuity that pays you $2,000 a month and the inflation rate averages 2%, those checks will have just $1,336 in purchasing power 20 years from now. You can find annuities with payments that increase over time, but this will cut down your initial income significantly.
Also Check: What Is A 401k Vs Roth Ira
But Why Would I Max Out My Roth Ira Before My 401k If Its So Good
Theres a lot of nerdy debate in the personal finance sphere about this very question, but our position is based on taxes and policy.
Assuming your career goes well, youll be in a higher tax bracket when you retire, meaning that youd have to pay more taxes with a 401k. Also, tax rates will likely increase in the future.
The Ladder of Personal Finance is pretty handy when considering what to prioritize when it comes to your investments, but it is just a tool. For more about the Ladder of Personal Finance and how to make it work for you, check out THIS video where I explain it.
PRO TIP: The video is less than three minutes long. It is worth your time.
Understand How Your Portfolio Is Impacted
The key to understanding how your stock portfolio may be impacted is to use the right tools to analyze your current holdings and enable you to perform the proper research to enable your investing strategy.
For example, if your current portfolio is already very defensive and has a low correlation with the current market direction, you may not need to take aggressive action.
Portfolio analytics and stock research are the keys to long-term successful investing. You need a tool that can provide:
- Detailed Company Financials
- Dividend History and Estimates
Stock Rover is our recommended Stock Screening, Research, and Portfolio Management tool, winning both our Best Stock Market Software Review and our Best Stock Screener Review.
Stock Rover can perform detailed portfolio analytics and assessment and help with rebalancing your portfolio. Not only that, but it can also connect to your broker and even help you create a Warren Buffett Value Investing Portfolio or a stable Dividend & Income Portfolio.
Read the Stock Rover Review or get Stock Rover for Free.
Don’t Miss: Where Can I Get A 401k Plan
Learning About Your Investment Possibilities
Learn More About These Investment Vehicles
Once you retire, your relationship with your money changes. After all, youre no longer drawing a paycheck and instead likely need to use some of your money to cover your day to day costs of living. To deal with that change, you need a smart investment plan for your retirement money that enables you to meet several different goals:
· Have the money you need to spend available to you when you need it,
· Deal with the fact that the market does go down from time to time, and
· Deliver enough growth to help cover your long-term costs and fight inflation over time
These six ways to invest your retirement money can each help you meet one or more of those goals. No one investment is likely to meet all your needs, but a combination could help deliver your end to end plan.
Previous
2 of 8
Read Also: How Does Taking Money Out Of 401k Work
