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401(k) is a form of hassle-free investing that makes life comfortable after retirement or when income streams run dry. A 401(k) rollover occurs when you transfer funds from your 401(k) account into another tax-advantaged retirement account. People roll over their 401(k) when they change jobs or retire.
The average American will hold at least 12 jobs before they retire. If you are wondering what to do with an old 401(k), there are four options on what to do with your old 401(k) account while moving from company to company.
Your employer may allow you to keep your old 401(k) plan indefinitely. However, you cannot make any new contributions to this old plan. You also have to keep tabs on fees associated with the account—don't forget about it to avoid penalties. According to the 401k rollover rules, this option is only applicable for people with at least $5,000 in their accounts.
Leaving your funds in your old 401(k) account is only feasible if your old employer has excellent liquidity management strategies in their plan. Furthermore, your investment options remain limited to your employer's investment strategies. Another downside is changing jobs while keeping your old plans can leave a trail of old 401(k) accounts. Thus, keeping organized becomes a daunting task.
You can take control of your retirement saving plans by rolling over your funds into an individual retirement account (IRA). 401k rollover to IRA comes with its advantages. First, IRA accounts do not have any links to your employment. They also offer plenty of investment options.
Furthermore, when you roll over 401k to an IRA, you avoid impending taxes because the IRA plan allows for pre tax dollar contributions. However, you must rollover your funds within the first 60 days to evade taxes and penalties. You also keep your account's tax-advantaged status because the IRA account is exempt from taxes. You only pay taxes for withdrawals and penalties for early withdrawals.
Instead of an IRA rollover, you can opt to move your funds into your new employer's plan. This may be the right option for someone saving for retirement while moving between careers. The move is feasible if your new employer has a better investment menu than the IRA plan. Your new employer's plan is an excellent option to avoid administrative responsibilities tied to an IRA rollover. The work goes to the administrator with the new 401(k) account.
Cashing out is an enticing option but one that you should avoid. If you withdraw your funds, you get a double hit. Aside from the savings accrued over the years, you also lose their compounding effect. When you cash out, you will also pay the 10% early distribution tax unless you are over 59½ years, permanently disabled, or meet other IRS tax-exempt eligibility criteria.
The four options are your only alternative when you leave your job. Your circumstances determine which option is best. For instance, if you need cash desperately, you can opt for a cashout. You can settle for an IRA rollover If you still have additional income streams. Alternatively, you can take your new employer's plan if another company hires you immediately after leaving your old job. It is best to discuss the options available to you with your financial advisor before making a decision.
A 401(k) distribution is the money taken from your retirement account. The IRS considers distributions as taxable income and levies it according to the tax bracket. Keep in mind, taking a distribution before your retirement age subjects you to penalties for early retirement. On the other hand, a rollover within the first 60 days of job termination is tax-deferred, and you get to enjoy the same tax benefits in your new plan. Choose the choice that is most suitable for your living conditions.
You may be able to live off your 401(k) if you start saving 10% to 15% of your income in your 20s. You can begin taking distributions at 59½ years of age. Regarding the amount saved, by 40, you will have three times the amount of your annual income saved in your 401(k). By 60, this amount increases sixfold.
Experts recommend saving 10% to 15% of your pre tax salary to live comfortably after retirement. People with higher income aim for close to 15%, while low-income earners save to a percentage that is closer to 10%. You can always talk to your 401(k) advisor about the exact amount you need to save to maintain your lifestyle.
A balanced fund distributes your 401(k) contributions between stocks and bonds at a 3:2 ratio. 60% of the funds go to stocks, and 40% goes to bonds. The conservative bonds reduce the stock risk bringing a balance or stability to your funds. You can always consult with a financial advisor from Burton Wealth Management on the best asset allocation.
What is a 401k rollover?
A 401k rollover is the transfer of funds from your 401k account to an IRA or other retirement savings account.
What happens if I don't roll over my 401k?
You will be exposed to penalties and taxes.
How long do you have to roll over a 401k after leaving a job?
You have 60 days. After this period, you will be taxed.
Can I move my 401k to an IRA without penalty?
You will not be penalized or taxed if you move your funds from a 401(k) to an IRA within the first 60 days.
Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of FINRA website for additional information
Burton Wealth Management can advise you on 401(k) rollover proceedings and all of your retirement savings account queries. Visit our website or call us today at (412) 749-0107 for consultations.
TBurton@BurtonWealthMgmt.com | (412) 749-0107