401k
A 401(k) is a retirement plan that is sponsored
by your employer and is added through your pay. Some employers also match what
you add to your 401k to help you save money even faster. There are penalties
that you must face when you withdraw money from this account before you retire
and there are annual limits that you can contribute to this account.
You can learn more about 401k’s and how to contribute to them by doing a little research online.
This
article will give you some information about what to do with your 401k when you
change jobs. There are rules that you must follow in order to avoid penalties
and there are also things that you can do to avoid having to pay extra taxes on
your 401k.
Information
If you are changing jobs and have had a 401k, there are rules that
you must follow in order to avoid penalties and extra taxes. You have some
options and some of those are listed below.
1.
Leave It Where It Is
You can just leave your
401k where it is especially if you have invested more than $5,000 in it. If you
leave it, you will not be able to contribute to it anymore but you will have
everything you have already contributed. If you have a large amount of money
invested in it already, it might be a good idea to leave it where it is. If you
think that you will forget about the account or you are just not happy with it
for any reason, you have other options.
2.
Roll It Over to Your New
Employer
If you are moving to a new
employer, see if they offer 401k’s and if they do, see if they allow rollovers.
Some employers require that you are employed with them for a number of days
before you can begin to contribute to retirement plans, so make sure that you
get it set up as soon as you can. You will want everything set up before you
can roll over your previous retirement plan.
It is a simple procedure
to roll over your old plan to a new one. It is just a matter of contacting the
person that was in charge of your old plan and signing some paperwork. They can
roll it over directly to your new account. You can also get a check and then
indirectly add that to your new account if you would rather do that.
3.
Roll It into an IRA
If you are not moving to a
new employer, you still have options for your 401k. You could roll it over to
an IRA account on your own. You can choose any financial institution that you
wish to since you are no longer bound by the rules of your employer. There are
several types of IRAs so be sure to check them all out before you decide which
one is best for you. You can look here to see more information about IRAs: https://www.investor.gov/additional-resources/retirement-toolkit/self-directed-plans-individual-retirement-accounts-iras.
You could even start a self-directed IRA that allows you to add the investments
of your choice that could include real estate, precious metals, and other items
that you might want to invest in. Any IRA would be a great way to roll over your
401k.
4.
Take Distributions
If you are over the age of
59 ½, you can begin to take distributions from your 401k without any penalties.
If you are retiring this would be the best idea for you since you will not have
to pay the 10% penalty for withdrawing early. You will have to start paying
taxes on your withdrawals just like you would any income unless you have had a
Roth account. If you have had a Roth account, all the withdrawals are tax-free
if you have had it for at least five years.
If you are under 59 ½ you
can still take distributions from your account but you will have to pay a
penalty of 10%. If you are between 55 and 59 ½ the penalty does not apply. You
need to be careful about taking distributions because you want to avoid all the
extra taxes and penalties.
5.
Cash it Out
If you want to, there is
nothing stopping you from cashing out your 401k and just taking a lump sum. You
will have to pay taxes and the 10% penalty, but the rest of the money will be
yours to use as you wish. This will reduce the amount of money that you will
have for retirement, but this might be okay if you have plans to retire before
you are 59 ½. You will need to be diligent about how you use the money in any
case.
What Happens if You Don’t Rollover in 60
Days?
If you fail to roll over your 401k in 60 days, you will face
penalties and extra taxes. This would essentially be the same as if you decided
to cash it out. This is a decision that you can make, but many financial
advisors would caution you not to do this. They would suggest that you roll it
over into something else that can provide for you during your retirement.
What is a Direct Rollover?
This is when the rollover goes from your previous job to your new
job without you seeing any of the money. You will do the paperwork and it will
go seamlessly from one account to the new one. The distribution is not made to
you, it is given to your new account. An indirect rollover would be one that
you would be given a check from your old account and then you would add that to
your new account.
What is the Required Minimum Distribution or
RMD?
RMD is the amount of money that you must withdraw from your 401k after
you reach the age of 73. There will be penalties if you fail to withdraw this
amount each year unless you are still working and your 401k was rolled over to
your new job. You would still have to use your money if you didn’t roll it over
to your new employer.
Conclusion
You have many options if you are leaving a job that has a 401k for
you. You can roll it over to a new account, leave it where it is, roll it over
to an IRA, cash it out, or start taking distributions. All of these options
have their pros and cons so you will have to decide which is best for you. It
would be best if you talked to a financial advisor to help you to make the
decision. They are paid to help you make the best decision for your money.
There
are rules and regulations that apply to each option, as well. There may be
extra taxes or penalties that you must pay if you don’t follow all the rules
and regulations. You just have to be careful and do what is right for you. You
could have many years ahead of you to plan for.