It's a major life change to leave your job. We don't blame if you aren't feeling the benefits of your employer-sponsored retirement plan right away. It's likely that you are still learning your way at your new job and will need to manage administrative tasks. It can be overwhelming. We urge you to look into 401k rollover options.
We will be covering different methods of transferring a 401k and the rollover process.
What is a rollover of a 401k?
You can direct your 401k rollover to transfer the money from your 401k plan into a new 401k or IRA.
Optional 401k Rollover
Let's begin with what your options are when it comes to your 401k.
- Your money can be left with your former employer's 401k plan. This is the easiest option, as it basically does nothing and leaves your 401k funds right where they are.
- Transfer your assets to an individual retirement account (IRA). If you don't have one, you will need to open one. You can transfer your 401k money to an IRA if you already have one.
- Transfer your old 401k to your new employer's plan for 401k. This will allow you to continue your 401k momentum.
- Take all your 401k funds and cash them out. You'll then "take the money, run", by withdrawing a lump sum from your old 401k. You will likely have to pay income taxes on the distribution if you are under 59 1/2 and a 10% penalty. Calculate it: 401k Early Withdrawal Calculator
- You could cash out a portion your 401k, pay any taxes or penalties, and then roll it over to an IRA, your new employer's 401k, or into an IRA.
Benefits of rolling over your 401k to an IRA
One common misconception about 401k plans, is that you can continue to receive matching contributions or vest the match if your funds are left in the account after you have left the employer. Although we hate to break the news, it is true. You will not only be denied matching contributions but also you won't have the ability to contribute to your old retirement plan.
For most people, the decision is simple: Roll over your 401k assets to an IRA.
There are certain situations where a cash-out may make sense. For example, if your company has stock in your 401k. High-income earners may encounter a taxable situation if they attempt a backdoor Roth conversion after rollingover a 401k to an IRA. Talk to your financial advisor if you feel this may be the case.
1. Rollover fees for 401k are lower
If there are additional fees, 401ks may be more expensive than IRAs. First, administrative fees. These fees are used to pay for the day-today operations of a retirement plan, such as record-keeping and accounting. Additionally, 401k investments are more costly than other investments outside of a retirement plan.
According to the Center for American Progress, 401k fees average around 1% of plan assets. Although it doesn't seem like much, let's look at a simplified example and see what impact 1% can make on your retirement assets.
Let's say you are 40 years old and have an old 401k with $150,000 of assets from a previous job. This plan has an annual expense of 1.5%. The account now has a value of more than $560,000 after 30 years (assuming a 6% compounding rate and a 1.5% fees).
A fee of 1% less, or 0.5%, would make your portfolio worth 33% more in 30 years. Your annualized net gain if you invest $150,000 in funds that charge 0.5% fees is 5.5%. This will make your $150,000 today into $750,000 over 30 years. You could increase your retirement savings by almost $200,000 by lowering your investment costs.
These plan fees are not included in IRAs, so it's worth considering a 401k transfer. Personal Capital's Fee Analyzer is free and will show you the potential impact fees have on your retirement plans.
2. Additional Investment Options
You can also roll your 401k into an IRA to increase your investment choices. After the money has settled into your IRA you and your advisor have access to thousands of ETFs or bonds, mutual funds, or individual stocks. There are many mutual funds available, but you don't have to choose from the few dozen that are typically included in a typical 401k. Here's an amazing fact: 401k plans may only offer three investment options.
Mutual funds are expensive and often underperform the market. ETFs are a tax-efficient, low-cost way to build a portfolio that is well-diversified. ETFs are low-cost investments that can help you increase your retirement security without increasing portfolio risk or savings.
Continue reading: Mutual Funds vs ETFs: What's The Difference?
Your investment time horizon, risk tolerance and other factors will all influence your decision about which asset classes to invest in. To help you determine your target allocation, and to see how your portfolio compares, use the Personal Capital Investor Checkup Tool.
You can trade within your IRA without generating reporting requirements from the IRS, just like any other retirement account. You can think of it as this: When you unload shares you are not taking a distribution and when you use the profits for reinvestment, you are not making a contribution. This benefit is greater in IRAs because you have more control over your investments.
Cashing out Your 401k
You can cash out any part or all of your 401k, as explained above. We don't recommend you cashing out your retirement plan if it is less than 59 1/2 years old due to the 10% tax and 10% penalty.
Cashing out a portion of your company stock investment could be a good idea. Why? The reason is that company stock is subject to a different tax treatment if it is taken as a lump-sum distribution from a 403k. You pay ordinary income tax on any withdrawals from a retirement fund, regardless of whether you take money out of a 401k for a lump sum distribution, or to supplement your retirement income. Therefore, appreciation and income gains are treated the same way.
The company stock can, however, be distributed from a Roth 401k as an unrestricted lump sum. The ordinary income tax rate will only be applied to the stock's cost basis. Your company stock's growth is considered "net realized appreciation," or NUA. Your NUA will be subject to tax only once the stock is sold. If the stock is not sold within a year of receiving the lump sum distribution you will be subject to long-term capital gains tax.
The NUA rules also require that you meet certain other requirements. You must first distribute within one year the entire vested balance in the plan, including assets from all accounts sponsored by the same employer.
Distributions cannot be converted into cash and must be taken in shares. Either you must have separated from the company or reached the minimum age to receive distributions, been injured resulting in disability, died, or both. You must carefully review the NUA strategy. It is not suitable for all. Before you move forward, consult your tax and financial professionals.
Read more: Can I Withdraw from My 401k Or IRA Penalty Free?
How to roll over your 401k to an IRA
These steps will help you rollover your 401k into an IRA.
- If you don't already have an IRA, open one. You should choose an investment company that offers many investment options, including mutual funds and ETFs. This will allow you to achieve broad asset allocation and diversification.
- Tell your former employer that your 401k funds are being transferred to an IRA. You should make sure that the check is made payable to the investment company and not to you. This is known as a trustee to trustee transfer. If you do not, 20% will be automatically withheld in order to pay taxes.
- After the transfer is completed, you can choose how to invest the money to reach your retirement goals. Every person's retirement investment strategy will differ based on their goals and risk tolerance.
Most Frequently Asked Questions
What is a rollover in a 403k?
A rollover occurs when funds are transferred from one eligible retirement plan into another, such as from a 401k or Rollover IRA.
Is it worth rolling over a 401k
Rolling over your 401k to an IRA account can be a worthwhile investment in many cases. You will have lower fees, more investment options and greater withdrawal flexibility.
Are You at Risk of Losing Money If You Transfer a 401k Account?
You won't lose any contributions, employer contributions, or earnings from your old 401k. Your money will remain tax-deferred until you withdraw it.
Here are some next steps for you
Register for Personal Capital's financial tools and you will have access to the Fee Analyzer. This will let you see how much investment fees you are paying. You'll also have access to the Retirement Planner when you sign up. This will let you see how likely your portfolio to support your retirement based upon your individual goals.
Consider talking to a financial advisor for guidance in your decision to transfer your old 401k.
Personal Capital: Get started
Frequently Asked Questions
How does a Gold IRA account work?
Physical gold bullion coin can be purchased at any time. You don’t have to wait to begin investing in gold.
The beauty of owning gold as an IRA is you can hold on to it forever. When you die, your gold assets won't be subjected to taxes.
Your heirs will inherit your gold, and not pay capital gains taxes. You don't need to include your gold in your final estate report, as it isn't part of the estate.
To open a IRA for gold, you must first create an individual retirement plan (IRA). Once you've completed this step, an IRA administrator will be appointed to your account. This company acts like a middleman between the IRS and you.
Your gold IRA custodian is responsible for handling all paperwork and submitting the required forms to the IRS. This includes filing annual reports.
When you withdraw your gold from your IRA, you'll pay taxes on it. You will be liable for income taxes and penalties if you take the entire amount.
Even if your contribution is small, you might not have to pay any taxes. There are some exceptions, though. However, there are exceptions. If you take 30% or more of your total IRA asset, you'll owe federal Income Taxes plus a 20% penalty.
It's best not to take out more 50% of your total IRA investments each year. If you do, you could face severe financial consequences.
How is gold taxed within an IRA?
The fair market value at the time of sale is what determines how much tax you pay on gold sales. If you buy gold, there are no taxes. It's not considered income. If you sell it after the purchase, you will get a tax-deductible gain if you increase the price.
As collateral for loans, gold is possible. Lenders will seek the highest return on your assets when you borrow against them. This usually involves selling your gold. It's not guaranteed that the lender will do it. They may hold on to it. They might decide that they want to resell it. You lose potential profits in either case.
So to avoid losing money, you should only lend against your gold if you plan to use it as collateral. Otherwise, it's better to leave it alone.
How Does Gold Perform as an Investment?
Gold's price fluctuates depending on the supply and demand. It is also affected by interest rates.
Because of their limited supply, gold prices can fluctuate. Physical gold is not always in stock.
What are the pros and cons of a gold IRA?
An Individual Retirement Account (IRA), unlike regular savings accounts, doesn't require you to pay tax on interest earned. This makes an IRA great for people who want to save money but don't want to pay tax on the interest they earn. However, there are also disadvantages to this type of investment.
To give an example, if your IRA is withdrawn too often, you can lose all your accumulated funds. Also, the IRS may not allow you to make withdrawals from your IRA until you're 59 1/2 years old. If you do decide to withdraw funds from your IRA, you'll likely need to pay a penalty fee.
You will also need to pay fees for managing your IRA. Many banks charge between 0.5%-2.0% per year. Other providers charge monthly management costs ranging from $10-50.
Insurance will be required if you would like to keep your cash out of banks. Most insurers require you to own a minimum amount of gold before making a claim. You might be required to buy insurance that covers losses up to $500,000.
If you choose to go with a gold IRA, you'll need to determine how much gold you want to use. Some providers limit the number of ounces of gold that you can own. Others let you choose your weight.
It is also up to you to decide whether you want to purchase physical gold or futures. Gold futures contracts are more expensive than physical gold. Futures contracts, however, allow for greater flexibility in buying gold. They let you set up a contract that has a specific expiration.
You will also have to decide which type of insurance coverage is best for you. The standard policy does not include theft protection or loss caused by fire, flood, earthquake. The policy does not cover natural disasters. If you live in a high-risk area, you may want to add additional coverage.
Apart from insurance, you should consider the costs of storing your precious metals. Storage costs will not be covered by insurance. For safekeeping, banks typically charge $25-40 per month.
A qualified custodian is required to help you open a Gold IRA. A custodian keeps track of your investments and ensures that you comply with federal regulations. Custodians don't have the right to sell assets. Instead, they must keep your assets for as long you request.
Once you've chosen the best type of IRA for you, you need to fill in paperwork describing your goals. Information about your investments such as stocks and bonds, mutual fund, or real property should be included in your plan. It is also important to specify how much money you will invest each month.
You will need to fill out the forms and send them to your chosen provider together with a check for small deposits. The company will review your application and send you a confirmation letter.
Consider consulting a financial advisor when opening a golden IRA. Financial planners have extensive knowledge in investing and can help determine the best type of IRA to suit your needs. They can also help you lower your expenses by finding cheaper alternatives to purchasing insurance.
What Should Your IRA Include in Precious Metals?
It's important to understand that precious metals aren't only for wealthy people. They don't require you to be wealthy to invest in them. You can actually make money without spending a lot on gold or silver investments.
You could also consider buying physical coins like bullion bars, rounds or bullion bars. Also, you could buy shares in companies producing precious metals. Another option is to make use of the IRA rollover programs offered by your retirement plan provider.
You can still get benefits from precious metals regardless of what choice you make. They are not stocks but offer long-term growth.
And, unlike traditional investments, their prices tend to rise over time. So, if you decide to sell your investment down the road, you'll likely see more profit than you would with traditional investments.
How is gold taxed within a Roth IRA
An investment account's tax rate is determined based upon its current value, rather than what you originally paid. If you invest $1,000 in mutual funds or stocks and then later sell them, all gains are subjected to taxes.
You don't pay tax if you have the money in a traditional IRA/401k. Dividends and capital gains are exempt from tax. Capital gains only apply to investments more than one years old.
Each state has its own rules regarding these accounts. Maryland is an example of this. You must withdraw your funds within 60 calendar days of turning 59 1/2. In Massachusetts, you can wait until April 1st. New York allows you to wait until age 70 1/2. You should plan and take distributions early enough to cover all retirement savings expenses to avoid penalties.
- If you take distributions before hitting 59.5, you'll owe a 10% penalty on the amount withdrawn. (lendedu.com)
- (Basically, if your GDP grows by 2%, you need miners to dig 2% more gold out of the ground every year to keep prices steady.) (smartasset.com)
- Instead, the economy improved, stocks rebounded, and gold plunged, losing 28 percent of its value in 2013. (aarp.org)
- This is a 15% margin that has shown no stable direction of growth but fluctuates seemingly at random. (smartasset.com)
- Gold is considered a collectible, and profits from a sale are taxed at a maximum rate of 28 percent. (aarp.org)
- 7 U.S. Code SS 7 – Designation of boards of trade as contract markets
- 26 U.S. Code SS 408 – Individual retirement account
How to keep physical gold in an IRA
The best way to invest in Gold is by purchasing shares of companies that produce it. But, this approach comes with risks. These companies may not survive the next few years. There is always the chance of them losing their money due to fluctuations of the gold price.
The alternative is to buy physical gold. You can either open an account with a bank, online bullion dealer, or buy gold directly from a seller you trust. This option has many advantages, including the ease of access (you don’t have to deal with stock markets) and the ability of making purchases at low prices. It is easier to view how much gold has been stored. You will receive a receipt detailing exactly what you paid. There's also less chance of theft than investing in stocks.
There are however some disadvantages. You won't be able to benefit from investment funds or interest rates offered by banks. Also, you won't be able to diversify your holdings – you're stuck with whatever you bought. Finally, the taxman might want to know where your gold has been placed!
BullionVault.com has more information about how to buy gold in an IRA.
By: Brian Cocos, CFP®
Title: 401k Rollover
Sourced From: www.personalcapital.com/blog/retirement-planning/401k-rollover/
Published Date: Fri, 11 Nov 2022 16:00:16 +0000