401(k)
A 401(k) plan can be a useful part of your RETIREMENT strategy, depending on your personal financial situation and retirement goals. And because they must be offered through your employer, 401(k)s can be an easy, automatic way to invest during your working years.
How is a 401(k) different from other investments?
401(k)s can be approached like any other long-term investment. You should achieve the right balance of good long-term growth prospects and risk-appropriate strategy. 401(k) accounts are unique in two ways:
- Your emotional attachment—you've worked your whole life for this money.
- Restrictive investment options most investors have to choose from up until they roll it over.
Traditional 401(k)s
- You can designate how much you want to save per pay period (up to $17,500 annually in 2014*).
- Contributions are deducted from your paycheck, pre-tax.
- Money you save grows tax-free—you don’t pay income taxes until you WITHDRAW the funds.
- Some employers contribute to their employees’ 401(k)s, usually a percentage of what you put in each year—free money!
Roth 401(k)s
There’s a special type of 401(k) known as a Roth 401(k), and it differs from a traditional 401(k) in one important way: You pay taxes on your contributions, but then you don’t pay taxes on future distributions.
In this time of job-changing and downsizing, you may need guidance on what to do with the assets you have accumulated in your company sponsored retirement plan. You may choose to preserve income tax benefits by rolling over into a Rollover IRA, or take the lump sum and pay the tax and penalties.
What is a Rollover?
Rollover means to move money from a 401(k) or other qualified retirement plan into an IRA. If you receive a payout from your company-sponsored retirement plan, choosing a rollover IRA could be to your advantage. You will continue to receive the tax-deferred status on your retirement savings and you will avoid penalties and taxes (restrictions, limitations and fees may apply).
Making Contributions to a Rollover IRA
The Rollover IRA is usually funded by the eligible distributions from a qualified company-sponsored retirement plan. These distributions can be combined with an existing IRA or placed into a separate IRA. If you create a separate IRA for your rollover, you can easily move these funds to another employer sponsored plan in the future if the company allows this. It’s a good idea to keep your rollover IRA separate from any other IRA’s you might have because once you make contributions to a rollover that are not from a company sponsored plan, you lose the right to move this rollover to a company sponsored plan in the future.
Distributions from a Rollover IRA
The distribution rules for a Rollover IRA are the same as the rules for a traditional IRA. Contributions and earnings are taxed when withdrawn after age 59 1/2. Withdrawals before the age 59 1/2 are taxable and subject to an early withdrawal penalty with certain exceptions. Withdrawals must begin by the year after you reach 70 1/2 to avoid penalties.
Your employer can directly rollover your retirement plan payout into a Rollover IRA and you will avoid the IRS withholding tax.
Before making any decisions about your pension distributions, be sure to contact us so that we can discuss the options that best fit your needs.
Educate yourself on this topic. I have two movies you should consider watching and I will email you the links if you request them from me. They will help you learn about the various options that may be available to you, and the financial impact of rolling over versus spending your accumulated retirement assets. Once a move is made, there are NO take backs.
Speak with our investment advisers to help you make smart choices on your 401k or IRA today, so you can have enough money to plan your retirement.
#1 THE IRA ROLLOVER – OPTIONS TO CONSIDER
When you leave your employer’s pension plan you may have as many as four options for your retirement assets. To make a good decision on how best to handle this money, it’s important that you clearly understand the options available to you.
#2 THE POWER OF AN IRA ROLLOVER
Over time, compounding rates of return combined with tax deferral can turn a small amount of money into a much larger amount. Using an example to illustrate the point, this movie can help you understand why a Rollover IRA can play an important role in strengthening your future financial security.
