Types Of Retirement Plans
Retirement plans have more benefits than simply saving money in a bank account to be used when you retire. With an employer-sponsored plan, you also benefit from years of employer matching.
What makes retirement plans really unique, however, are the tax benefits. Most plans are tax-deferred or tax-advantaged. Here are some of the most common retirement accounts you may have already picked up in your career.
Traditional Individual Retirement Accounts
An IRA is an account that you open and fund yourself . This is the most popular type of tax-advantaged accounts. IRAs in 2020 provided an upfront tax break of $6,000, plus an extra $1,000 catch-up contribution for those ages 50 and above.
With traditional IRAs, so long as the money remains in the protection of the account, investment earnings are not taxed. Withdrawals made in retirement are taxed at the tax rate of that time.
If I Change Jobs A Lot Should I Consolidate My Retirement Accounts
This is a question that every American worker should be asking. Long gone are the days of staying with the same company for an entire career. According to the U.S. Bureau of Labor Statistics, even the youngest baby boomers worked an average of 10.2 different jobs from ages 18 through 38 . The millennial generation jumps ship even faster, projected to hold an average of 15 to 20 jobs over the course of their careers .
Not all jobs offer retirement benefits, but if you are lucky enough to receive a 401 plan, you need to think about what you want to do with that account if you leave your job. According to retirement planning experts, you have three major options:
- Keep the 401 with your old employer
- Transfer the funds to a 401 at your new job, or
- Rollover your old 401 into an IRA
What you absolutely positively should not do is cash in your 401 when you change jobs. If you are younger than 59½, not only will you have to pay income tax on that money, but you will owe an additional 10 percent “early distribution” penalty. Let’s say you’re in the 28 percent tax bracket and you have $10,000 saved in your 401 account. If you withdraw the money early, you will lose $2,800 to taxes and an additional $1,000 to penalties, leaving only $6,200 in your pocket.
Let’s start by looking at the benefits of leaving your 401 right where it is.
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Should You Have A Joint Retirement Account
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No matter what stage of life youre intackling student loan debt or buying a houseits likely that planning for retirement may be looming in the back of your mind. And thats a good thing: According to the Center for Retirement Research, 50% of households are at risk for not having enough to maintain their living standards in retirement.
50% of households are at risk for not having enough to maintain their living standards in retirement.
One way to start your retirement savings plan is to work shoulder-to-shoulder with your partner. You have probably heard of joint checking accounts, but what about joint retirement accounts? While some retirement plans do not allow for multiple owners, there are ways couples can plan their retirement savings together.
Next Steps To Consider
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Recently enacted legislation made a number of changes to the rules regarding defined contribution, defined benefit, and/or individual retirement plans and 529 plans. Information herein may refer to or be based on certain rules in effect prior to this legislation and current rules may differ. As always, before making any decisions about your retirement planning or withdrawals, you should consult with your personal tax advisor.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
Be sure to consider all your available options and the applicable fees and features of each before moving your retirement assets.
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Can You Contribute To A 401k And 403b In The Same Year
In short, you are able to contribute to a 401k and 403b in the same year, but some restrictions do apply on much money you can put into either plan.
In 2018, the contribution limits state that you can make a salary deferral contribution up to $18,5000 and for those over 50 years of age, you can make an additional $6,000 contribution.
Both accounts need to be taken into consideration, with a combined contribution of $18,500 for both, or $24,500 if youre eligible for age-related catch-ups.
People who have worked with certain employers for at least 15 years might be given an extra contribution limit of $3,000.
Therefore, if youre over the age of 50 the maximum amount you can put into these accounts in a year would be $27,500.
If both of these accounts are in place with the one employer, they will usually be able to monitor how much is going in and let you know if youre close to reaching his limit.
However, for people with different employer 401k and 403b plans, they will be unable to find this out.
Therefore, its your responsibility to stay on top of your combined contributions otherwise you will be liable for hefty penalties and taxes if you go over.
Option : Cash Out Your Old 401
Another option is cashing out your 401, which does exactly what you would expect provides cash. But there are many implications to consider. The cash you withdraw is considered income, and you may incur local, state and federal taxes by doing so. You will lose the benefit of giving your accounts investments time to grow, and you may need to work longer to make up the difference. Whats more, if you leave your employer prior to the year you turn 55 and are younger than 59 ½, you will be required to pay a 10% early withdrawal penalty on top of any taxes on the money.
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Option : Doing Nothing
Lastly, you may opt to leave your 401 accounts exactly as they are. Here are some pros and cons of this strategy:
Pros:
1. You are happy with the financial institution and/or investments
If you like your current investment allocation and investment options and want to continue using them, you may choose to leave your 401 as it is.
Cons:
1. Difficult to manage
It could be hard to manage a cohesive investing strategy across multiple accounts. This may be especially true for someone that has multiple accounts at different institutions.
2. Cannot add money to an old employer-sponsored 401
It is not possible to contribute new money to an old 401 account that was previously tied to an employer. New money must go into a current 401 or some other self-directed retirement account, such as a Solo 401, Roth IRA, or Traditional IRA.
If you do not currently have access to an employer-sponsored 401, you may want to seek out another retirement account for which you can make contributions.
3. Possible maintenance fees
Old 401 accounts may charge monthly or annual fees such as account maintenance fees. By consolidating, it may be possible to eliminate all or most of these fees.
For example, a person could roll old 401 accounts that charge a maintenance fee into an account that has no such fee, whether that be their current 401 or a Traditional IRA.
4. Limited investing options
In general, a Traditional IRA can provide more flexibility and investing options than a 401.
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Reason Not To Consolidate #: Backdoor Roth Ira Contributions Are More Complicated
If youre a high earner and have hit the income limitations for annual Roth IRA contributions, then the back-door Roth IRA contribution strategy may still be there for you.
However, if you roll your 401 over into an IRA, then the tax treatment of these back-door Roth IRA contributions becomes even more complicated and may make the entire process less advantageous. If you want to use this tactic every year to add funds to your Roth IRA, then consolidation may not be a good idea at this time.
That being said, the size of the 401 and the quality of its investments should be considered here. If you have a $1 million 401 with limited investment options and high fees, it may be a good idea to consider the IRA.
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Should I Combine My 401 Accounts
If youre reading this article, you might be at the point during your career where youve got at least one 401 account that youre no longer contributing to. If you are wondering whether to combine your 401 accounts, here are a few of your options:
1. Rolling the 401 account into your active 401.
2. Rolling the 401 account into a Traditional IRA at an institution of your choosing.
3. Doing nothing, and leaving the account as-is.
Everyones financial situation is different, so consider the pros and cons of each option when trying to decide what is best for you. When weighing your options, here are some things you might consider:
Less Confusing For Beneficiaries
When you pass, your beneficiaries get your retirement accounts. If you have multiple accounts, its easier for them to miss one or two, letting your money go unused. Give them to a manager, certified financial planner, or another financial professional to worry about and consolidate your retirement accounts.
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Spouses Can’t Combine Accounts
Spouses can’t combine retirement accounts while they’re both alive. A retirement account must be titled in one persons name.
After you or your spouse dies, the deceased person’s IRA can be rolled over into the surviving spouses IRA. Your spouse must be the beneficiary of your IRA, unless they have signed a waiver giving you permission to name someone else. The same rule does not apply to a 401 account.
Consolidating Your Retirement Accounts Can Help
Heres some good news. In most cases, you dont have to leave those accounts with your former employers. Instead, you may be able to roll them over into a single retirement account.
This is known as consolidating accounts. And it offers a lot of advantages.
Consolidating retirement accounts can make it easier to:
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Reason To Consolidate #: You Make Your Estate Planning Much Easier
Not only are multiple accounts more difficult to track, having multiple accounts creates more work for your executor and heirs, if thats important to you. In addition, each retirement account has its own separate beneficiary designation, making potential estate planning changes more difficult.
I heard a story once where someones ex inherited a very large retirement account because the beneficiary designations were never updated!
So right now, you may be leaning toward consolidating some of your retirement accounts. Lets go over a couple of reasons to consider not consolidating these accounts.
Understand The Potential Tax Impacts
When you consolidate retirement plans, it’s called a rollover. Rollovers don’t count as withdrawals. You won’t owe the 10% early withdrawal penalty for making this move. You can also avoid income taxes depending on how you handle the rollover. You can move money between pre-tax accounts tax-free as well as between after-tax accounts tax-free.
If you want to move a pre-tax retirement account into an after-tax retirement account, like moving a 401 into a Roth IRA, you would owe income tax on whatever you transfer over. After the Roth conversion, your investments would then grow tax-free. It may be worth the upfront tax hit, depending on your goals. Just make sure you’re aware of the impact before handling this consolidation.
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You Can Only Make One Ira Rollover Per Year
You can make only one rollover between IRAs in any 12-month period. If you have a lot of IRAs to consolidate, you’ll have to spread the rollovers out. This time restriction applies to traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP-IRAs.
This rule does not apply to:
- Conversions of traditional IRAs to Roth IRAs
- Rollovers from any other type of retirement plan to an IRA
- Rollovers from an IRA to a different type of retirement plan
- Rollovers between non-IRA retirement plans
What if you carry out a second IRA rollover before 12 months have passed? The IRS will require you to include as gross income on your tax return any previously untaxed amounts distributed from an IRA. And those amounts may be subject to a 10% early-withdrawal penalty tax.
Determine When Both Of You Will Retire
Do you know when you and your partner will retire? Remember, retirement plans like 401s and IRAs cannot be withdrawn penalty-free until you reach age 59½.
If you or your partner do plan to retire earlier than 59½, it might make sense to put some of your retirement funds into a taxable brokerage account that you can access at any time.
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When You Can Rollover A 401
In order to combine separate 401 accounts, the investor must currently be enrolled in one, either through her employer or by holding a self-employed 401. Because 401s are workplace plans, you can’t make new contributions, including rollovers, to an old 401. In many cases, you can roll over a 401 from your past job into the 401 offered by your current employer, though not all plans allow this. Many financial institutions let individual professionals open self-employed 401 plans that also could accept 401 rollovers.
Ira Rollovers For 401 Plans
Some 401 account holders may not have an active plan. Combining 401 accounts into one isn’t an option since those accounts won’t take new contributions. However, any 401 owner can rollover their accounts into an IRA, which offers some advantages to a 401. If you roll over into a 401, you are limited to the investments that your workplace plan offers — including fees. If you choose to roll over into an IRA instead, you have control over the company with which you invest, the individual investments themselves and the costs and fees you will pay.
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Option : Keep Your Savings With Your Previous Employers Plan
If your previous employers 401 allows you to maintain your account and you are happy with the plans investment options, you can leave it. This might be the most convenient choice, but you should still evaluate your options. Each year, American workers manage to lose track of billions of dollars in old retirement savings accounts, so you should make sure to track your account regularly, review your investments as part of your overall portfolio and keep the beneficiaries up to date.
Some things to think about if youre considering keeping your money in your previous employers plan:
Can You Combine 401 Accounts In Another 401 Plan
Whether or not you can combine 401 accounts into another 401 plan depends on the 401 plan you hope to transfer the funds into. Some plans are more flexible about transferring funds from other plans. You can check with the human resources department at your workplace for more information about what your 401 plan does and doesn’t allow.
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Assess Your Total Savings
Once you have your retirement accounts under control, take a look at your overall savings. Make sure you have three-to-six months worth of your household income set aside for emergencies. One way to quickly derail a great retirement savings plan is to have a financial emergency come up where you have to use your retirement funds, potentially triggering a penalty and certainly triggering income taxes on the distribution, Kujala says. Having an emergency fund can help you avoid that problem.
Also, make sure youre satisfied with the amount youre saving for retirement. A general rule of thumb is 10-15% of your pre-tax salary each year. And finally, dont forget to diversify your investment accounts. Doing so can help you reduce risk, maximize your savings and potentially lower your taxes.
After your retirement accounts are organized, consolidated, and rebalanced as necessary, review them annually. Armed with a clear picture of your savings, you can feel more confident about being on track for a financially healthy retirement.
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Option : Roll Over Your Old 401 Into An Individual Retirement Account
Still another option is to roll over your old 401 into an IRA. The primary benefit of an IRA rollover is having access to a wider range of investment options, since youll be in control of your retirement savings rather than a participant in an employers plan. Depending on what you invest in, a rollover can also save you money from management and administrative fees, costs that can eat into investment returns over time. If you decide to roll over an old 401 into an IRA, you will have several options, each of which has different tax implications.
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