Understanding your 401(k) rollover options help you make a smarter choice for your retirement dollars
Amidst gradually more unstable global economy, one should make an appropriate decision on what to do to with their 401(k) plans. If you’re an employee, chances are you already know what a 401k plan is.
This plan enables an employee or worker to build retirement fund by investing savings into shared funds or other investments with the benefit of deferred taxes on these investments. However, these contributions stop when they quit or change from one employer to another.
When an employee leaves a company, the money can be rolled over into a new 401(k) account by the new employer or possibly roll the money over to an IRA.
First, let’s take a look at some of the reasons why people want to rollover their 401(k) plan,
1. Leave a career or employer
2. Become disabled
3. Being a victim of corporate layoff
4. Want to avoid mandatory state or federal withholding taxes
5. Want to have bigger retirement savings
6. Reach age 59 ½.
In other words, people generally want to make the most out of what they have, and to keep charges and taxes to a minimum.
Know Your 401(k) Rollover Options
If you are leaving your current job or about to retire, a 401(k) rollover is certainly worth considering; but before you can make a decision, you need to know what all of your options are. Simply put, you have the following options according to 401(k) rules:
- Leave your money in your former employer’s plan
- Roll over your money to your new employer’s plan
- Roll it over to an IRA
- Transfer it to a Roth IRA
- Cash out the account and pay the associated taxes and penalties
#1. Leave your money behind
Perhaps the simplest option is to leave your money in your former employer’s 401(k) plan without the hassle of moving your money around. But first, you ought to weigh on your age.
First of all, for 59 ½ – 70 ½ year old folks, do this as long as the amount is greater than $5,000. Any amount less than $5,000 will usually be distributed to you regardless of your age.
For those under 59 ½ years old, leave it with your old employer providing that it’s more than $5,000. For those above 70 ½, do the same and begin taking the required minimum distribution. In this event, you will be taxed 50% of the required minimum distribution.
However,
For greater tax benefit, the best option is still to do a 401k rollover. This option allows you to move your existing plan into another retirement account, but without incurring any taxes or penalties.
Meanwhile, the following are several possible 401(k) rollover options you can choose from when you want to rollover your 401(k) plan:
#2. Rollover to the new employer’s plan
Don’t leave your money behind! This option allows you to continue to make contributions to your 401(k) account. But first, check with your new employer’s eligibility rules.
Plus: Avoiding current income taxes and the 20% withholding tax
Minus: No access to the savings yet
#3. Rollover to IRA (Individual Retirement Account)
If you want to have more control over your retirement fund, rolling over your 401(k) to an IRA may be the best 401k rollover option as long as you’re aware of the IRA rollover rules. Not to mention its ease of transfer and greater investment choices.
Plus: Letting your capital to compound, no mandatory state or fed withholding taxes, no 10% penalty, more power and flexibility
Minus: Possibility to lose tax-deferred status for good if lump-sum distribution is somehow received. Loans may not be made from an IRA.
#4 Cash out your 401(k) retirement plan
For 59 ½ – 70 ½ year-old folks, your provider will write a check for the value of your account less a 20% withholding tax. For ones under 59 ½ years old, you’ll get a check less a 20% withholding tax and a 10% withdrawal penalty (exceptions). For people above 70 ½, you’ll get a check for your account value less a 20% withholding tax.
Plus: Providing immediate access to your savings
Minus: Paying state and fed income taxes, 20% mandatory fed income as stated by IRS and the 10% penalty fee (a.k.a premature distribution penalty)
2010 Contribution Limits
The 401(k) contribution limit for is $16,500 for those under 50 years old. For anyone between the ages of 50 and 59 ½ years old you also have the option of contributing an additional $5,500 as a catch-up contribution.The IRA contribution limit for is $5,000 for those under 50 years old, with a $1,000 catch-up contribution option for those between 50 and 59 ½ years old.
About This Site
This site is intended to provide general information about 401k rollover options and IRA retirement plans. Nothing on this site should be considered legal, financial or other advice of any kind. If you're looking for professional advice, you should consult with an independent financial adviser.Additional Resources
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