Might Be More Stressful
When youve got all the power, all the glory and all the pain is on you. I used to check my 401 linked to my Personal Capital account along with other portfolios maybe once or twice a week to make sure everything is on track. Now I check my rollover IRA on a daily basis because Ive got much higher risk with single stock investments. Speak to any hedge fund analyst or manager and they will tell you they are always on because of whats going on in the Asian markets at night and the European market closing during our early mornings.
You can easily reduce your stress by having a more diversified rollover IRA portfolio that mimics exactly what you would have bought in a 401. But Im a balls to the wall type of guy who bets big if I believe strongly in something. Having 25 positions at 4% each is very uninteresting. Give me five positions at 20% each or even three positions at 33% each and its game on! One of my biggest regrets at age 22 was not investing more in a stock that returned 50X in one year. At least I did invest several thousand dollars which I parlayed into my first rental property.
We can talk about portfolio theory and the efficient frontier in another post. Im very risk loving with my rollover IRA because I dont need the money and I cant touch the money without penalty until age 59.5. My pre-tax retirement portfolios have always been seen as funny money where the government could easily taketh away.
The Benefits Of Rolling Over Your 401 When You Leave A Job
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
Whenever you change jobs, you have several options with your 401 plan account. You can cash it out, leave it where it is, transfer it into your new employer’s 401 plan , or roll it over into an individual retirement account .
Forget about cashing it outtaxes and other penalties are likely to be staggering. For most people, rolling over a 401or the 403 cousin, for those in the public or nonprofit sectorinto an IRA is the best choice. Below are seven reasons why. Keep in mind these reasons assume that you are not on the verge of retirement or at an age when you must start taking required minimum distributions from a plan.
How To Start A 401 To Ira Rollover
Doing a 401 rollover to IRA isnt terribly difficult. Once youve figured out exactly which IRA you want to use, set one up with that company. You can do this online, just like youd start any other financial account.
Next, get in touch with the financial company managing your 401. Ask if they have any special rollover requirements, and assuming youve met all of them, have a check for your assets mailed to the company you opened an IRA with. That company will then deposit it in your account. Youve officially completed your rollover!
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Gold Ira Rollover Rules
The IRS does have rules and regulations surrounding 401 rollovers. While these rules may seem draconian at first, they are in place to prevent people from abusing the system.First, you must inform your current 401 provider of your intent to make a rollover within 60 days of receiving the check. This is to prevent you from sitting on the money and earning interest in your personal bank account before sending it to your new 401 account.Second, if you are under the age of 70 1/2, you are required to make a direct rollover. This means you must deposit the funds directly to your new IRA provider you cannot take possession of the money and then deposit it later. This prevents you from circumventing the law and earning interest in your own account before handing it over to the new provider.If you are 70 1/2 or over, you have a bit more time to make your decision and can set the money aside in either a Traditional IRA or a Roth IRA.Third, there is a minimum holding period of your rollover contribution. This means that you must leave the money within your rollover account for at least a year before making any withdrawals. If the account is a Roth IRA, you must leave it for at least five years before making any withdrawals. This prevents people from using the rollover system to make a quick profit.
Why You Might Not Want To Combine Your Ira With Your 401
On the flip side, there are plenty of areas where a traditional IRA has a leg up on a 401 that is, of course, why so many people roll a 401 into an IRA. Here are the biggest you should know:
Wider investment selection: Within an IRA, you can invest in nearly anything under the sun not just the mutual funds, index funds and exchange-traded funds that show up in 401 plans, but also individual stocks and even options . You can also shop around for the absolutely lowest-cost funds, which can save you money. As noted above, you should look closely at your 401 plan and its investments to see if youd save money by leaving your funds in your IRA.
More loopholes for early withdrawals: Aside from the aforementioned loans, a 401 may allow hardship withdrawals in certain situations the IRS defines hardship as an immediate and heavy need, which means things like unreimbursed medical expenses, funeral expenses or disability. Those will waive the 10% penalty on early distributions youll still owe income taxes on the withdrawal. But a traditional IRA casts a wider net, allowing early distributions without penalty but with taxes still owed for higher education expenses and a first-time home purchase .
Low-cost options for investment management: If your 401 plan doesnt come with anything in the way of investment advice, and you want that sort of thing, youll have more options for getting it on the cheap within an IRA if youre open to a robo-advisor. .)
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The Growth Potential For Precious Metals Has An Incredibly Large Upside
Many people believe that investing in gold and other precious metals is a great way to hedge your portfolio against tough economic times as well as an unstable economy.Finally, many 401k plans actually have high fees associated with them. A direct rollover allows you to bypass this and go with a New Direction Gold IRA, which has much lower annual fees.
When It Might Make Sense
Here are some of the most common reasons people roll IRAs into 401 accounts.
Avoid required minimum distributions : After you reach age 70 1/2, the IRS may require you to take money out of pre-tax retirement accounts, which helps generate tax revenue. But if you are still working, you might be able to wait until you retire to take RMDs from your 401 . Some owners of the business even partial owners arent allowed to use that strategy, so check with the IRS or a good CPA before you attempt this. Switching from an IRA to your 401 allows you to delay taxes, potentially resulting in more compounding.
Backdoor Roth and conversions: If you plan to convert traditional IRA money to Roth IRA money or make back door Roth contributions you might want to minimize pre-tax money in IRAs. Doing so may neutralize the pro-rata rule, which causes complications and taxes when you have pre-tax money in an IRA. By shifting that pre-tax IRA money to your 401, only post-tax money remains in the IRA, which simplifies things substantially.
Age 55 withdrawals: 401s can be more flexible than IRAs if youre between the ages of 55 and 59 1/2. With an IRA, you have to wait until age 59 1/2 to take withdrawals without penalty taxes . With a 401, you can take withdrawals without penalty if you retire at 55 or older. Its probably not ideal to cash out all of your retirement money when youre that young, but its an option.
When Do You Plan To Retire
If you separate from service with a given employer in or after the year in which you reach age 55, you can take penalty-free distributions from that employers 401 plan, whereas normally you have to wait until age 59.5 .
As such, if you plan to retire in or after the year you turn 55 but before you turn 59.5, having more money in your final employers 401 may make it easier to meet your living expenses without having to find another exception to the 10% penalty. If you expect to be in such a scenario , rolling your current 401 into your new 401 could be advantageous.
Rolling Your Annuity Into A 401
Can you roll your annuity over into your 401? It depends.
First, your annuity would need to already be an IRA annuity. And second, your 401 plan would have to allow you to roll money from other tax-deferred retirement plans into it.
You should check with the person in charge of your employers plan. You should also check with your annuity provider and review the contract to make sure youre able to take the funds from the annuity.
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Do Not Have The Check Written In Your Name
When I was communicating with my previous 401k provider, I made sure the checks were written to the Fidelity and sent directly to Fidelity.
If the check is accidentally sent to you, make sure you get it over to your new brokerage partner as soon as possible. There are penalties for not having the funds allocated quickly enough.
You can also do a Trustee to Trustee transfer that helps make this process smooth.
Why Should You Consider A Gold Rollover
First, you need to understand that the 401 and IRA have a very similar tax structure. Both are considered retirement accounts and both allow you to defer taxes until a later age. The difference with an IRA is that it gives you more investment options. And since gold has been a strong commodity over the last several years, it simply makes sense to roll over your 401 into an IRA specifically designed to handle precious metals.In a rollover IRA, gold coins can actually provide larger capital gains tax write-offs. In addition, the IRA has more options for joint accounts, trust accounts, and even IRA accounts for your children.
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Are You Planning Roth Conversions
If you are planning Roth conversions in your traditional IRA and your traditional IRA includes amounts from nondeductible contributions , then it can be wise to avoid rolling 401 money into a traditional IRA, because doing so would increase the amount of tax youd have to pay on your conversions.
This wouldnt necessarily mean, however, that you should roll your old 401 into the new 401. It might just mean that you should temporarily leave your old 401 where it is, with the plan to roll it into an IRA in some future year .
How We Can Help
If you have a 401 and are exploring what options make the most sense for you, we invite you to meet with one of our financial advisors to discuss your situation. He or she will take the time to explain the options available to you, answer any questions you may have and together you can determine what’s best for you.
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Establish A Rollover Ira
If you dont already have a relationship with another brokerage firm, consider Vanguard, Fidelity or Schwab. These companies all have excellent low-cost index fund options for you to choose from.
Since Nicole and I were already partners with Fidelity, this part was easier for us. We opened a Rollover IRA account with Fidelity and this allowed us to not pay any taxes or any penalties on the rollover.
Tips For Retirement Investing
- Consider finding a financial advisor to steer you in the right direction in terms of savings and investments. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- When youre starting to plan for retirement, you should consider the tax laws of the state you live in. Some have retirement tax laws that are very friendly for retirees, but others dont. Knowing what the laws apply to your state, or to a state you hope to move to, is key to getting ahead on retirement planning.
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What To Do With Employee Stock
If you have employee stock through your former employer, youll also have to decide what to do with those shares. In the case of stock you already own, Deering advises that it might make sense to sell those shares. At the very least, ensure the stock doesnt make up a disproportionate percentage of your portfolio, as can sometimes happen with employee stock.
According to Deering, the primary consideration is whether theres anything that prevents you from selling the stock. In some cases, there may be lock-up periods that bar you from selling your shares for a particular amount of time. And if youve owned the shares for less than one year, then it makes sense to hold them until the one-year mark when you qualify for long-term capital gains tax treatment.
If you have any remaining stock options, those will likely expire within three months of leaving the company. Whether you choose to exercise those should depend on the current stock price compared to the price your options allow you to purchase them at, as well as how much of the companys stock you already have in your portfolio.
You Get To Pick A Provider That Works For You Not Your Company
Unlike a 401 where the company chooses the provider for you, you actually get to pick which institution to have your IRA at. So if a seamless digital experience is important to you, you can pick one of the many digital advisors that offer IRAs. If you want a brand-name institution, you can pick one of those too.
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Rolling Over Your 401 To An Ira
Another option when you leave a job is to roll your 401 balance into an IRA or individual retirement account. An IRA is also a tax-advantaged retirement account, but rather than being sponsored by an employer, its self-directed.
One of the primary reasons someone might choose to roll their 401 into an IRA is the wider variety of investments available, says Lazetta Rainey Braxton, a certified financial planner and the co-founder of the financial planning firm 2050 Wealth Partners,
With the rollover IRA, you have more options in terms of what you can invest in, whereas with an employer 401, its the employers responsibility to figure out what the investment menu is, Braxton says.
If you already have an IRA, then you can often roll your 401 balance into your existing account. If you dont already have an IRA, then youll have to open one before you can initiate the transfer.
Once you have an IRA, contact your former 401 plan administrator and let them know youd like to roll the balance over. They may require paperwork completed by either you or your IRA provider.
The rollover will happen in one of two ways:
You Might Want A Roth Account
Avoiding Roth IRA income restrictions. Even if your annual income is above the thresholds for Roth IRA contributions, youre still allowed to roll your 401 savings into a Roth IRA. This move is commonly referred to as a backdoor Roth IRA conversion, and it can grant you the benefits of tax-free withdrawals in retirement.
No required minimum distributions . With a 401or even a traditional IRAyoure subject to RMDs, or the mandated annual withdrawals from your retirement savings once you reach age 72. Roth IRAs are free of RMDs, providing you with more control over your retirement savings.
Tax-free withdrawals in retirement. When you roll over a traditional 401 into a Roth IRA, youll probably end up paying some taxes on the amount youre converting. But these taxes may be less than what youd pay if you took regular withdrawals from a traditional 401 in retirement.
Access to additional death benefits. Because there are no lifetime distribution requirements, you can pass down your Roth IRA to your heirsalthough beneficiaries need to draw down the account within 10 years.
Henderson cautions that you must be aware of the immediate tax consequences when you roll your money from a 401 to a Roth account.
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