What Are My 401 Options After Retirement
Generally speaking, retirees with a 401 are left with the following choices: Leave your money in the plan until you reach the age of required minimum distributions convert the account into an individual retirement account or start cashing out via a lump-sum distribution, installment payments, or purchasing an annuity through a recommended insurer.
How Should I Invest My Retirement Savings
Your early years of retirement are critical for avoiding major losses. Taking withdrawals when your account balance is down can cause you to run out of money sooner than anticipated. However, that doesnt necessarily mean you need to avoid risk altogether.
Youll hopefully live for many years during retirement. Over time, prices rise, and you may need your account balances to grow some to keep up with inflation and fund an income stream that lasts for the rest of your life. If you keep your money in low-yielding safe instruments, you might not get enough growth.
Finding the right balance is difficult, and its easy to get drawn into too-good-to-be-true investments that appeal to your desire to preserve money. A diversified mix of low-cost mutual funds or ETFs can help many people fund a comfortable retirement. The question becomes exactly how to spread your money among those investments, and that depends on your need for risk.
You can find a risk-tolerance quiz on this page, which may provide insight. Plus, strategies like bucketing can also provide peace of mind. Just remember that there are pros and cons to every strategy.
Ira Rollover Bridge Loan
There is one final way to borrow from your 401k or IRA on a short-term basis. You can roll it over into a different IRA. You are allowed to do this once in a 12-month period. When you roll an account over, the money is not due into the new retirement account for 60 days. During that period, you can do whatever you want with the cash. However, if its not safely deposited in an IRA when time is up, the IRS will consider it an early distribution. You will be subject to penalties in the full amount. This is a risky move and is not generally recommended. However, if you want an interest-free bridge loan and are sure you can pay it back, its an option.
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Employer And Employee 401k Contribution Limits
You cannot go over a specified limit for 401k contributions, which applies to the sum of elective deferrals , employer matching contributions, employer nonelective contributions and allocations of forfeitures. Well define all of these below.
- Elective deferrals: Elective deferrals refer to amounts of money you elect to transfer from your pay and into your employers retirement plan.
- Employer matching contributions: Employer matching contributions refer to contributions your employer makes to your retirement plan account if you contribute to the plan from your salary. Heres an example of a common 401k match plan formula: 50 cents on the dollar up to 6% of the employees pay. Not taking advantage of the match means you dont get free money, so its always advantageous for you to get the match!
- Employer nonelective contributions: When an employer makes a contribution to an employee in an employer-sponsored retirement plan , these are employer nonelective contributions.
- Forfeitures: Forfeitures hold employer contribution amounts that accrue when you leave the plan and youre not fully vested in the plan. Vesting means that you own the money in your plan. If youre not fully vested and you leave your job, your company can take the money in your plan.
She calls Personal Capitals blend of technology and personal advice more 21st century. She added, I dont need a company with walnut-paneled offices. Its a modern, intelligent approach.
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Convert To An Ira And Keep Contributing
You cannot contribute to a 401 after you leave your job, so if you want to continue adding money to your retirement funds, youll need to roll over your account into an IRA. Previously, you could contribute to a Roth IRA indefinitely but could not contribute to a traditional IRA after age 70½. However, under the new Setting Every Community Up for Retirement Enhancement Act, you can now contribute to a traditional IRA for as long as you like.
Keep in mind that you can only contribute earned income, not gross income, to either type of IRA, so this strategy will only work if you have not retired completely and still earn taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment, as the IRS puts it. You cant contribute money earned from either investments or your Social Security check, though certain types of alimony payments may qualify.
To execute a rollover of your 401, you can ask your plan administrator to distribute your savings directly to a new or existing IRA. Alternatively, you can elect to take the distribution yourself. However, in this case, you must deposit the funds into your IRA within 60 days to avoid paying taxes on the income.
Traditional 401 accounts can be rolled over into either a traditional IRA or a Roth IRA, whereas designated Roth 401 accounts must be rolled over into a Roth IRA.
Your 401 Is A Big Part Of Your Retirement Savings But You Don’t Know The Last Time You Logged In
Effectively managing your investments and making the right financial decisions takes time, skill, and effort. Its not something you only need to do once. Your investment options change, the account needs to be rebalanced periodically, and as your 401 grows, you may benefit from a personalized investment mix rather than the age-based allocation in a target-date fund.
Regardless of whether you lack the time, desire, or investment acumen, the result is the same. Thankfully, it’s a solvable problem, and likely worth it have an advisor manage your retirement plan. Time is money, and theres a cost to delaying good financial decisions or extending poor ones, like keeping too much cash or putting off doing an estate plan.
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Retirement Questions To Ask
Nobody teaches you how to retire in school, so you may not know whats most important when planning for retirement. These are the first retirement questions to ask as you imagine your transition out of the workforce. As you move through this list, youll likely uncover additional questions that provide valuable insight.
You can work through these questions yourself or ask a financial advisor to help you project how your retirement might unfold.
How To Talk To An Employer About Your 401
Online financial software has made it possible for retirement investors to compare their 401 with other plans in a matter of minutes and, in some cases, at the press of a button, send an email to their company’s CEO to show that the plan isn’t measuring up to the competition.
Technology, however, is a passive method of communication. In fact, Nevin Adams, director of education for the Employee Benefit Research Institute, said that although emailing a company HR department or CEO is the most frequently dispensed advice from personal finance columnists, he thinks it is an “extraordinarily ineffective way” to get things changed, unless a plan participant has strong existing relationships with the company’s officers.
That doesn’t mean there aren’t good reasons to have a conversation with your company about the retirement plan. From plan fees and diversity of investment offerings to company-match levels, there are several critical issues that go into a 401 plan that will go a long way toward making or breaking your retirement nest egg.
“Think about how much time an average person spends thinking about their next washing machine or car or home,” said Dave Blanchett, head of retirement research at Morningstar. “They spend so much time on this, but retirement is the biggest purchase. … Spend some time on it.”
Here are six things to keep in mind before talking to your employer about your 401 plan.
Of course, easier said than done.
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Dividing Your 401 Assets
If you divorce, your former spouse may be entitled to some of the assets in your 401 account or to a portion of the actual account. That depends on where you live, as the laws governing marital property differ from state to state.
In community property states, you and your former spouse generally divide the value of your accounts equally. In the other states, assets are typically divided equitably rather than equally. That means that the division of your assets might not necessarily be a 50/50 split. In some cases, the partner who has the larger income will receive a larger share.
For your former spouse to get a share of your 401, his or her attorney will ask the court to issue a Qualified Domestic Relations Order . It instructs your plan administrator to create two subaccounts, one that you control and the other that your former spouse controls. In effect, that makes you both participants in the plan. Though your spouse cant make additional contributions, he or she may be able to change the way the assets are allocated.
Your plan administrator has 18 months to rule on the validity of the QDRO, and your spouses attorney may ask that you not be allowed to borrow from your plan, withdraw the assets or roll them into an IRA before that ruling is final. Once the division is final, your former spouse may choose to take the money in cash, roll it into an IRA or leave the assets in the plan.
Where To Get Advice For Your 401
A few months ago I reported on a study showing that found people who get advice regarding their 401 plans are better savers.
Not only did they save more in their 401 plans, but they had a better idea of how much they should save before their last day of work, the Natixis study found. There was, however, one major hold-up: Many people surveyed said they did not seek financial advice when it comes to retirement savings. Most also did not use the tools and calculators offered by their plan providers.
Some of this is due to inertia. People love to procrastinate when it comes to financial decisions. But readers who weighed in suggested its also difficult to know where to start. Where should people go to get solid advice when it comes to their 401s and other retirement accounts?
Theyre probably not getting it at the office. For many people, a workplace retirement account will be the primary source of income once they are ready to stop working. But employers are not rushing to give workers financial advice. In fact, many would prefer to hand off those responsibilities to a third party as a way to limit their responsibility, says Mitch Tuchman, managing director of Rebalance IRA, a company that manages retirement investments.
So where to go for advice?
Some firms will offer quarterly reminders encouraging people to re-balance their accounts, or to make sure theyre sticking to the targets set.
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Federal Insurance For Private Pensions
If your company runs into financial problems, you’re likely to still get your pension.
Insures most private-sector defined-benefit pensions. These are plans that typically pay a certain amount each month after you retire. These are single-employer plans. Multi-employer plans have different coverage.
Covers most cash-balance plans. Those are defined-benefit pensions that allow you to take a lump-sum distribution.
Weighing Pros And Cons
Before you determine whether to borrow from your 401 account, consider the following advantages and drawbacks to this decision.
On the plus side:
- You usually dont have to explain why you need the money or how you intend to spend it.
- You may qualify for a lower interest rate than you would at a bank or other lender, especially if you have a low credit score.
- The interest you repay is paid back into your account.
- Since youre borrowing rather than withdrawing money, no income tax or potential early withdrawal penalty is due.
On the negative side:
- The money you withdraw will not grow if it isnt invested.
- Repayments are made with after-tax dollars that will be taxed again when you eventually withdraw them from your account.
- The fees you pay to arrange the loan may be higher than on a conventional loan, depending on the way they are calculated.
- The interest is never deductible even if you use the money to buy or renovate your home.
CAUTION: Perhaps the biggest risk you run is leaving your job while you have an outstanding loan balance. If thats the case, youll probably have to repay the entire balance within 90 days of your departure. If you dont repay, youre in default, and the remaining loan balance is considered a withdrawal. Income taxes are due on the full amount. And if youre younger than 59½, you may owe the 10 percent early withdrawal penalty as well. If this should happen, you could find your retirement savings substantially drained.
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How Much Money Do I Need To Retire
The amount you need depends on several factors, like your age at retirement, how long you live, and how much income you get from pensions or Social Security. If theres a gap between your spending need and your retirement income, youll need to fill that gap by taking withdrawals from your retirement savings.
Three of the most important factors are how much youre going to withdraw, for how long, and any earnings or losses on your savings. You can learn more and see a chart with savings checkpoints in a detailed article on how much money you need. The amount you need might range from several hundred thousand dollars to a few million dollars.
You can do a quick estimate of how much money you need by multiplying the amount you want to withdraw by 25. For example, if you plan to withdraw $40,000 per year, youd multiply that by 25 to arrive at a goal of $1 million. This is a rule of thumb based on the controversial 4% rule, so you might want to adjust that number if you have doubts about that strategy. Any rule of thumb ignores things and is perfect, but it can help with quick estimates.
Continue reading below, or get some of these answers in the companion video:
How Much Does It Cost To Set Up A 401 For A Small Business
Costs to set up a 401 plan will vary depending on the size of your business and the types of benefits you select. Initial setup fees can generally run anywhere from $500 to $3,000, depending on the chosen retirement service provider. Other costs to consider are fees associated with rolling assets over from another plan and initial consulting costs for investment advice.
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When Can I Withdraw My Money
In general, if you make a withdrawal before you are age 59½, you have to pay a 10% penalty tax on the distribution. In cases of hardship, you may not have to pay the penalty. These hardship exemptions can include:
- Suffering a disability
- Certain home repairs
- Having or adopting a child
Once you turn 72, you need to take required minimum distributions from all of your 401sexcept for a plan offered by a company you’re still working for. In general, you have to start withdrawing money by April 1 of the year following the year you turn 72. Your age and account value determine the required minimum distribution.
How Much Does It Cost To Have An Advisor Manage Your 401
Compensation methods vary between advisors and retirement plans. At one of the larger 401 plan providers , you may have access to a group to ask questions. Support may be narrow in scope, but that might be ok depending on your needs. Plan fees may cover these services. Alternatively, plan providers could charge an asset-based fee or earn commissions based on recommendations. Consider the cost-benefit along with the depth and quality of the personal advice you require.
Another option is to work with an independent, fee-only financial advisor. The fee-only model helps reduce conflicts of interest as the advisor doesn’t double as a salesperson. A truly independent advisor isn’t employed by/affiliated with a fund company, which can mean more objective advice. Also ask financial advisors if they are a full-time fiduciary, always acting in your best interest.
How much it costs to work with an advisor depends on the advisory firm, your financial situation, and the services you receive. While cost is an important component, the cheapest option today might be the most expensive in the long run.
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