Your Quick Start Guide: 401k Rollovers
Understanding 401k Rollover
Doing a 401k rollover is the most common procedure for most people when they change companies. Rather than having to cash out their 401k, which usually results in a penalty of ten percent as well as taxes for that current year, people are able to move funds from one 401k to another, or even to a non-work-related account like an IRA (Investment Retirement Account).
This allows people to continue to save for retirement at their new company without having their previous earnings affected in any real way.
It sounds simple, but “rolling over” a 401k can still go wrong if a few rules aren’t followed. One main rule is the same property rule, which prevents people from trying to make other income non-taxable.
Basically, the money that you move has to be the same money in the account. You cannot, for example, take the money in your 401k account, purchase some other assets with those funds, and then deposit the money that is left into the new account. That purchase money will result in the ten percent penalty for early withdrawal from your 401k.
Another 401k rollover restriction involves how often you can move money around. 401k rollovers are only allowed once a year per accounts involved. What this means is that the accounts that 401k savings are moved from and to cannot be involved with a second rollover for one year, whether they are on the receiving or giving end.
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This prevents quick turnarounds so you need to be sure about where you want to move your money.
There is another time rule with 401k rollovers. This one is called the 60-day rule and it means that after receiving funds from your IRA, you have to rollover the money to another IRA. This rollover is not counted with the above one year rule.
If you don’t do this, then not only is the income treated as ordinary and taxable income, but you will also be considered to have withdrawn the funds and have to pay the ten percent penalty if you are younger than fifty-nine and a half.
When you are planning a 401k rollover, it is best to seek the opinion of someone who gives out professional 401k advice. One way to ensure that you do not run into problems with rollovers is to take advantage of transfers instead. A lot of situations will allow you to do a transfer of your savings rather than a formal rollover and it will be a much easier process for you.
The Rollover To IRA Strategy
When people decide to change jobs, they usually need to settle their 401k account and this is where a rollover to IRA comes in handy. Typically, closing a 401k will result in penalties for early withdrawal, as well as the immediate imposition of taxes.
A rollover avoids all of this by allowing people to move their retirement savings into another account that is also designed for retirement. This could be a new 401k savings plan with a new employer or a rollover to IRA that allows you to continue to save without the presence of an employer.
So most people choose to rollover to an IRA in order to avoid those penalties and to continue to contribute and earn money in their tax-free, 401k savings account. What is needed is an Investment Retirement Account (IRA) and generally speaking there are two choices.
The traditional IRA works along with the same principle as the traditional 401k retirement plan, where you are only charged taxes when you make withdrawals. The Roth IRA is where you pay your taxes on any increase of income in that tax year. Which one you choose will depend on how much you earn and how much you expect to be earning once the rollover occurs, and when you plan on withdrawing the money.
Any rollover to IRA should be carefully thought out before any action is taken. The rollover plan is there to help people avoid paying penalties and high taxes, yet if the transaction is not done properly, then financial losses can occur anyway.
Check out the different financial institutions available that can help you set up your IRA and help with the rollover. It is especially beneficial if the institution has staff members who are well versed in the 401k rules so they can help ensure the procedure is a smooth one.
Troubleshooting a 401k rollover to IRA should also be done. Some 401k plans will contain a clause that requires you to pay a fee when you transfer funds. Talk to your potential IRA administrator about whether they will pay the fee if you sign on with them.
If you want to rollover to a brokerage firm, there may be restrictions in that you can only use cash. This needs to be checked by both the administrator of your 401k and by the potential brokerage firm you are thinking of transferring funds to. And of course call and confirm that the funds from your 401k have actually been transferred to your new IRA. Sometimes mistakes happen so it’s best to confirm.
So when quitting your work, a rollover to IRA is one of the best ways of avoiding penalties and high taxes that usually come with withdrawals of funds from a 401k account. Make sure that all the paperwork is correct and that the procedures are followed to the letter. If everything is done properly, then your funds will be switched and you can continue saving for your retirement.
The 401k Plan Choices
A standard 401k plan allows taxpayers to save money for retirement, usually with their employer matching some or all of their 401k contributions on a regular basis.
There is a catch, however. In order to encourage people to save money for retirement, and to only use that money once they have stopped working, there are tax considerations, yet there are also penalties if money is withdrawn too early. A ten percent penalty is imposed on any early 401k withdrawal, and of course, you have to pay tax at your current rate.
It is the tax that is the main concern for most responsible citizens who are able to save money with their 401k investing and not need it until much later in life. With a 401k retirement plan, the money you earn in your account is not taxed until you withdraw it.
The principle here is that people withdrawing from their 401k accounts will likely be retired and therefore in a lower tax bracket than when they were making their money. For some people, though, being taxed when withdrawing funds from their 401k will not be financially advantageous and this has led to many choosing Roth 401k plans.
For people who want to get tax-paying done at the start, the Roth plans are the best way to go. It is also a good choice for those who expect to be in a higher tax bracket when they retire.
The reason for this is that the Roth plan operates by having account owners pay tax on whatever they earn in the same taxation year. This is the exact opposite of the traditional 401k plan where taxes are not imposed until the money is taken out of the account.
A Roth 401k is not the way to go for individuals currently earning a significant amount of money and planning to be in a lower tax bracket when they are at retirement age.
There are other considerations as well, like the fact that money in a Roth account cannot be moved to a regular 401k account. As well, there are not many employers out there willing to offer Roth plans, due to the extra administration required to offer the standard 401k retirement plans in addition to the Roth ones.
The standard Roth or 401k plan is similar in purpose, in that they are both there to encourage and enable people to save money for their retirement.
The differences in how the funds in the accounts are taxed will be the main deciding factor in choosing which plan works best for you. As with most long-term investment strategies, having a mix of different funds will probably result in the best retirement strategy.
The Loan Benefits 401k Plans Provide
Social security is in real danger and so the Benefits 401k plans offer have been looked at very closely in recent years.
There are lots of good reasons to invest your money in a 401k account, namely that it could be the only real source of income-you will have once you stop working, given the doubts of social security’s ability to sustain itself for much longer.
Therefore, you should start contributing and start now before it gets too late to build up any real earnings from your investments.
Although the benefits that a 401k plan offers are plenty, these are retirement plans, and the expectation is that no money is taken out until you reach retirement age (fifty-nine and half are when you can start making withdrawals without penalty).
There are, however, occasions in your life when you may run into financial difficulties and the only source of income you may have in your 401k savings. You can always take money out of your account but then you will have to pay the ten percent penalty, as well as tax on the amount that is taken out. Another option that may be available is to borrow from your 401k retirement plan and then pay it back.
The loan Benefits 401k plans may offer will depend on the type of plan and how your employer has set it up. Often, you are only able to take out a 401k loan if you have financial hardship (e.g. you may lose your property because you are unable to make certain payments). In some cases, though, you may be able to get a loan for something that is non-emergency related, like a new car or perhaps for the renovation of your home.
The amount you borrow may be restricted to half the funds in your account, or a maximum of $50,000. You will then need to repay the loan, following whatever guidelines are in place for your particular 401k pension account.
Usually, you have about five years to repay the loan, making quarterly or monthly payments on a regular basis. It is very important that you follow the rules for repayment closely. If you do not, there is a strong chance that the IRS will consider the loan ordinary income, meaning you could be forced to pay tax on the amount you borrowed, as well as the ten percent penalty charge for early withdrawal.
There are many benefits 401k plans offer and the chance to borrow money from your 401k is just another way of having more control over your finances. It is impossible to predict what will happen in our lives, like running into financial difficulties, yet having a significant amount of money available that you cannot touch makes little sense. Therefore, there are loan opportunities through your 401k savings. Just make sure you pay back the loan to avoid any extra costs or loss of money.
401k Retirement And It’s Basic Facts
Most people know about 401k retirement plans. They are an easy method of putting aside money for retirement, with favorable tax breaks. Savings are only taxed when money is withdrawn. 401k plans are quite useful in helping people save effectively, but they are not in place for anything other than retirement.
This means that any need for a withdrawal of money from your 401k retirement before you are a certain age will likely result in steep penalties or at least a lot of red tape in order to access the funds.
The standard withdrawal from a 401k retirement plan occurs when an individual has reached the age of 59 and a half or over. Once this milestone has been reached, the government will not impose an early withdrawal penalty of ten percent on whatever you take out.
The 401k accounts are there to provide Americans with money when they retire, and the tax breaks that are involved are only available for those who use the account for retirement purposes. If money is withdrawn earlier, then there will be penalties.
Though 401k retirement plans are just that, for retirement purposes, it is understood that sometimes people will run into financial difficulties over the course of their lives that can only be solved by having access to the funds in their 401k account.
It is not something the plan is particularly designed for, but the government will sometimes accept a hardship withdrawal from your 401k in certain situations. You really have to demonstrate that those funds are all that you have and that there is an immediate and pressing need to have access to a significant amount of money in order to avoid a bad situation.
Usually, a 401k withdrawal because of hardship is allowed in cases where the loss of property could occur.
There are a few other withdrawals that can be made from your 401k investment account before you actually retire that will not necessarily incur penalties.
Most of these situations are special exceptions, such as when you die and the money from your 401k is distributed to your beneficiaries or your estate; when you have medical expenses that are more than 7.5 percent of your gross income; or when distributions are made to the IRS to pay for any levy that may be on the plan.
There is no point in saving a lot of money in your 401k retirement plan and then losing some of the profit you have made by making an early withdrawal.
The plan is there for retirement purposes, not for any other reason. In the event that you have to have access to funds to prevent a worse financial situation, talk to a financial advisor to see what options may be available to you to avoid penalty fees.