Amidst
gradually more unstable global economies, 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 a 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 or face a plan termination event. Under any of these conditions, 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.
Plan terminates due to merger, acquisition or other event
3.
Become disabled
4.
Being a victim of corporate layoff
5.
Want to avoid mandatory state or federal withholding taxes
6.
Want to have bigger retirement savings
7.
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.
Regardless
of the circumstances, 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:
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)
Minus: No
access to the savings yet
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.
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.
The
following are several possible 401(k) rollover
options you can choose from when you want to rollover your 401(k)
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
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.
There are
many reasons to rollover a 401k to an IRA. One of them is that IRA offers
significant tax savings and greater opportunity to compound your money
tax-free.
This
rollover option also gives you maximum control of your investments and
flexibility of choice since you are not limited to the investment options
provided by your employer. You have absolute control of which company to invest
your money with and you can base your decision on the types of funds, fee and
track record of the company. With a traditional 401k, you have no control over
those things.
However,
before you initiate the move, it is important that you’re aware of the IRA rollover rules so as to avoid negative tax
implications when performing an IRA rollover.
Whenever
you rollover your 401k
plan to IRA, you will be issued a check for 80% of the account value
of your 401k account and will have 60 days to deposit the money into an IRA.
This is sometimes known as the 60-day
rollover rule. However, you will still be expected to deposit
the full 100% of your 401k account balance into the IRA plan.
For
instance if you are rolling over a $100,000 account into an IRA, you will be
given a check for $80,000 and expected to deposit $100,000 into your IRA plan
with your own $20,000 (which will be reimbursed later when you do your taxes).
If you’re
late, the money will be treated as a ordinary income
and taxed at your current ordinary income tax rate. Plus, if you did not reach
age 59.5 when the distribution occurred, it will be deemed as a taxable
distribution and you’ll face a 10% penalty on the withdrawal.
Optionally,
if you’re going to transfer your 401k into an IRA, authorize for direct rollover
via a trustee-to-trustee transfer to avoid 20% automatic withholding penalty.
In a direct 401k rollover scenario, there will be no taxes incurred even if you
rollover maximum funds.
For this
reason, a direct 401k rollover is really the safest, easiest and most
convenient way to move your retirement funds.
At Pile
Wealth Management we can help you decide which option is right for you and then
navigate you through the necessary paperwork.
We currently manage a large number of IRA rollover accounts and would be
happy to explore this option further with you.