Transfer To A Retirement Plan Account With Principal
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What Are The Choices With A 401 Distribution
When you have a 401 with an employer and you decide to leave the company, you have four basic options:
Cash Out the Plan
If you choose this option, you simply direct the plan trustee to liquidate the account and send you a check.
The account will be closed out, and no further action is necessary.
Advantages: If the balance in the plan is relatively small, like a few thousand dollars, you may decide the money would be better used to pay off debt.
This can make sense if the tax liability on the distribution isnt too high, and the interest youre paying on the debt you intend to pay off is much higher than the investment return in the 401.
Disadvantages: Youll have to pay ordinary income tax on the amount of the distribution, which wont make sense if youre in anything higher than the 12% tax bracket.
But if youre under 59 ½ youll also have to pay the IRS 10% penalty on early distributions.
Keep the 401 with the Previous Employer
This is the simplest choice of all. You decide to do nothing, and leave the account where it is.
Unless the employer has some sort of rule requiring disposition of the account following separation, you can literally leave the money in the plan for the rest of your life.
Advantages: No action is required on your part. If youre satisfied with the investment options in the plan, as well as the plan performance, theres no need to move the money.
Roll the Previous Employer 401 into the New Employers Plan
Do a 401 Rollover to an IRA
Make The Best Decision For You
When it comes to deciding what to do with an old 401, there may be factors that could be unique to your situation. That means the best choice will be different for everyone. One thing to remember is that the rules among retirement plans vary so it’s important to find out the rules your former employer has as well as the rules at your new employer.
Do also compare the fees and expenses associated with the accounts you’re considering. If you find it confusing or overwhelming, speak with a financial professional to help with the decision.
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Periodic Distributions From 401
Instead of cashing out the entire 401, you may choose to receive regular distributions of income from your 401. Usually, you can choose to receive monthly or quarterly distributions, especially if inflation increases your living expenses. If the 401 is your main source of income, you should budget properly so that the distributions are enough to meet your expenses.
For example, if you have accumulated $1 million in retirement savings, you can choose to receive $3,330 every month, which amounts to approximately $40,000 annually. You can adjust the amount once a year or every few months if your 401 plan allows it. This option allows the remaining savings to continue growing over time as you take periodic distributions.
Invest Your Newly Deposited Funds
You’ll have to choose investments in your new IRA so your money can grow. Make sure to maintain an appropriate asset allocation given your age, and consider your risk tolerance.
Finally, when your new IRA has been opened, be sure to read up on common IRA mistakes to avoid, such as forgetting required minimum distributions, not designating beneficiaries, and trading too often in the account.
What To Consider When Rolling Over A 401
If youre not required to move your money from your old 401 account, consider leaving the account open. Ask yourself a few questions to see if you really do need to do a rollover:
- Does a new rollover account offer valuable features such as greater investment options or cheaper funds? If so, it could make sense to roll over your account.
- Do you value the convenience of having your money consolidated in one place? If so, it could make sense to roll over your 401.
- If you roll over your 401 to an IRA, do you have the ability or resources to manage it yourself? With an IRA youll have to manage your investments or hire someone to do it for you. If youre not up to that job, it may make sense to stick with your current plan.
- If you roll over your 401 to an IRA plan), are you alright with losing some of the 401s benefits such as the ability to take out a loan? Youll want to consider whether you need any special features of the 401 before you move it to an IRA.
Those are some of the key issues youll want to consider as youre considering a rollover. Above all, try to avoid making an emotional decision in managing your money, such as doing a rollover simply to get away from your old employer. Instead, make the best money decision for you.
Option : Move The Money To Your New Employer’s 401 Plan
Moving money to your new employers 401 may be an option, depending on whether your current employer has a 401 plan and the terms of the plan. Like your former employer’s plan, many factors ultimately depend on the terms of your plan, but you should keep the following mind:
- Ability to add money: You’ll generally be able to add money to your new employer’s plan as long as you meet the plan’s requirements. This option also allows you to consolidate your retirement accounts, which may make it easier to monitor your investments and simplify your account information at tax time.
- Investment choices: 401 plans typically have a more limited number of investment options compared to an IRA, but they may include investments you can’t get through an IRA.
- Available services: Some plans may offer educational materials, planning tools, telephone help lines and workshops. Your plan may or may not provide access to a financial advisor.
- Fees and expenses: 401 fees and expenses often include administrative fees, investment-related expenses and distribution fees. These fees and expenses may be lower than the fees and expenses of an IRA.
- Penalty-free distributions: Generally, you can take money from your plan without tax penalties at age 55, if you leave your employer in the calendar year you turn 55 or older.
- Required minimum distributions: Generally, you must take minimum distributions from your plan beginning at age 72, unless you are still working at the company.
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Benefits Of A 401 Rollover
Rolling over your 401 to an IRA before you retire has multiple benefits, especially as you near or enter your retirement years:
1. Consolidate your funds to know where you stand – It helps you know where you stand financially by seeing your consolidated retirement savings in a single account. This way, you can determine how long your funds will last and what kind of lifestyle they can support in retirement.
2. Ease of withdrawing to support your lifestyle when youre retired – When its time to withdraw your funds during retirement, its a lot easier if your money is consolidated in an IRA. If you have multiple 401, youll have to manage many accounts carefully to ensure your money lasts the entirety of your retirement.
3. More Investment options – You will most likely have more investment options in an IRA than in your 401, allowing you to customize your portfolio to match your stage in life and adjust over time.
4. Greater visibility and control over fees – You can choose an IRA provider with transparent fees so you know how much youll pay, unlike a 401 where you dont have any control over the provider fees.
Are There Exceptions To The 10% Early Withdrawal Penalty
If youre under 59½ when you cash out of your plan, you may also be subject to a 10% early withdrawal penalty. Certain exceptions include:
- If youre 55 or older when you leave your job.
- Distributions due to death, disability and certain medical expenses.
- You take the distribution as part of substantially equal payments over your lifetime.
Ask your financial professional for more information about these and other exceptions.
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Rollover To An Annuity
A guaranteed lifetime income annuity, similar to a pension distribution, will provide a steady stream of income that’s guaranteed to last for the rest of your lifeno matter how long you live.1 With an annuity that offers a guaranteed payout, you wont have to worry about the impact a decline in the market will have on your payments.
Avoid Taking The Cash
When times get tough, it can be easy to see the cash in your retirement account and consider tapping that to help get you through. In fact, in a recent Bankrate survey, about one in four Americans said that they had hit up their retirement savings or planned to do so as a result of the coronavirus-related economic decline.
Taking an early withdrawal comes with a heavy cost. If you take money out of a 401 before retirement age , the IRS will hit you with a 10 percent bonus penalty on top of the taxes that youll already owe. In addition, you may have to sell investments at low prices, and youll lose any potential appreciation over your working years, hitting your nest egg still more.
If you must tap your retirement account, see if your plan allows you to borrow against the money in the account. Youll have to repay the funds, of course, but you may be able to avoid the taxes, which is a win in itself. You may also see if you can take a hardship withdrawal.
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Keep Your 401 With Your Former Employer
If youre satisfied with the performance of your 401 under your former employer, you may choose to keep it with your old company, provided the account has at least $5,000 in it. Its important to note that a 401 with less than $5,000 may automatically be deposited into an IRA in your name by the plans administrator, depending on the plan. If the account has less than $1,000, the plans administrator may send you a check for that amount.
While you wont be permitted to make new contributions to the 401 if you keep it with your previous employer, your earnings will remain tax-deferred until you take a distribution. Youll also preserve the ability to roll it over in the future.
When comparing your former companys plan to what your new employer offers, lower fees and better investment options may also lead you to keep your 401 with your old company and forgo a rollover.
Do I Have To Leave My Job To Withdraw My Retirement Plan Money
Not necessarily, although thats what most plans require. If your employer terminates your retirement plan, or if you become disabled, you may be given an opportunity to take a distribution. Also, some retirement plans permit you to draw on your retirement plan money after a fixed number of years or upon reaching a certain age, such as 59½ or the plans designated retirement age.
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Start Living On A Budget And Tracking Your Expenses
The fact is that until you know where your money is going each month youre going to have a hard time finding money to set aside for retirement savings.
The reason its so important to discover and track where your money is going each month is so that you can identify wasteful spending and reroute it toward causes that are more important to you.
Many people find when they start tracking expenses that they are spending money in $5, $10 and $20 increments that seems like its not a lot but adds up to hundreds or thousands of dollars each month.
When my family started tracking expenses in 2013, we were able to cut them down by nearly $1,000 a month and we were making well under $100,000 per year at the time.
By trimming grocery expenses, cutting back on entertainment costs and being more mindful of each purchase, we found a lot of waste in our spending. We were able to use what we were wasting for much more important things, such as paying off our debt.
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Choose Which Type Of Ira Account To Open
An IRA may give you more investment options and lower fees than your old 401 had.
If you do a rollover to a traditional IRA, the taxes are deferred.
If you do a rollover from a Roth 401, you won’t incur taxes if you roll to a Roth IRA.
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Contact Fidelity And Ask For A Direct Rollover
Reach out to a Fidelity representative about beginning your rollover. The company has a set procedure to follow for rollovers.
Be very sure, though, to emphasize that you want a direct rollover, meaning youre moving the funds directly from one retirement account to another. No taxes will be withheld from the transfer amount, according to the IRS.
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Rolling Over Your Old 401 To A New Employer
Many companies offer 401 plans, so people often end up having multiple 401s over their years in the workforce. If youd rather keep your funds in a single 401 or dont want to open an IRA, you might have the option of transferring assets from your old 401 to your new one at your current job. If not, youll need to keep an eye on how each is performing individually.
The process for this is as simple as talking to both your current and past plan providers to make sure they will both accept a transfer of assets. While the providers can offer more specific instructions, youll likely use one of the methods above to complete the rollover.
Note that not all plan providers will accept employees past 401 funds as a rollover. This is because they may not be willing to add more assets to the plan, which could overwhelm it.
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Why Not Just Take It All
If you’re over 55 and are no longer working, or are over 59-1/2 regardless of your employment status, then you can withdraw your entire account balance in one lump sum. However, this is rarely a good idea, especially if you have a large amount of money in the plan. In addition to losing the creditor protection I mentioned earlier, you could incur severe tax consequences, as the money you withdraw from a 401 counts toward your taxable income.
For example, if you have a 401 account with more than $418,401 in it , a lump sum withdrawal could put you in the highest tax bracket for this year, even if you had no other income. This could take a serious and unnecessary bite out of your retirement savings.
What Factors Should Be Considered With 401 Rollover Options
Ed Slotts staff recommends that financial professionals consider how a rollover recommendation may affect the following variables:
- Available investment options
- Simplicity or convenience
- Estate planning implications
As can be seen, there are many variables to consider with any rollover decision. Educate yourself, understand your options, and work with a qualified professional who can clearly walk you through all 401 rollover possibilities. Decide wisely, and you will have taken an important step toward financial security and peace of mind in your retirement years.
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Roll It Over To Your New Employer
If youve switched jobs, see if your new employer offers a 401, when you are eligible to participate, and if it allows rollovers. Many employers require new employees to put in a certain number of days of service before they can enroll in a retirement savings plan. Make sure that your new 401 account is active and ready to receive contributions before you roll over your old account.
Once you are enrolled in a plan with your new employer, its simple to roll over your old 401. You can elect to have the administrator of the old plan deposit the balance of your account directly into the new plan by simply filling out some paperwork. This is called a direct transfer, made from custodian to custodian, and it saves you any risk of owing taxes or missing a deadline.
Alternatively, you can elect to have the balance of your old account distributed to you in the form of a check, which is called an indirect rollover. You must deposit the funds into your new 401 within 60 days to avoid paying income tax on the entire balance and an additional 10% penalty for early withdrawal if youre younger than age 59½. A major drawback of an indirect rollover is that your old employer is required to withhold 20% of it for federal income tax purposesand possibly state taxes as well.
Convert To An Ira And Keep Contributing
You cannot contribute to a 401 after you leave your job, so if you want to continue adding money to your retirement funds, youll need to roll over your account into an IRA. Previously, you could contribute to a Roth IRA indefinitely but could not contribute to a traditional IRA after age 70½. However, under the new Setting Every Community Up for Retirement Enhancement Act, you can now contribute to a traditional IRA for as long as you like.
Keep in mind that you can only contribute earned income, not gross income, to either type of IRA, so this strategy will only work if you have not retired completely and still earn taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment, as the IRS puts it. You cant contribute money earned from either investments or your Social Security check, though certain types of alimony payments may qualify.
To execute a rollover of your 401, you can ask your plan administrator to distribute your savings directly to a new or existing IRA. Alternatively, you can elect to take the distribution yourself. However, in this case, you must deposit the funds into your IRA within 60 days to avoid paying taxes on the income.
Traditional 401 accounts can be rolled over into either a traditional IRA or a Roth IRA, whereas designated Roth 401 accounts must be rolled over into a Roth IRA.
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