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| Rolling Over Your 401(k)? |
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Rolling over your 401(k) Are you rolling over your 401(k)? After retiring or leaving a company you have to make a decision as to what to do with the money inside of your 401(k) plan. You generally have three options when withdrawing funds from your 401(k) account; Lump sum distribution, leave it in the plan, or direct rollover. Lump Sum: You have the option of taking a full withdrawal of all the money inside of your 401(k) plan. If you do this you will be forced to pay ordinary income tax on the entire balance of the withdrawal. Since money in your 401(k) plan is not taxed going in, it is all 100% taxable on the way out. If you are below the age of 59 ½ in addition to paying income tax you will also pay a 10% excise tax as a premature distribution. For both of these reasons previously mentioned this option is rarely recommended. Leave it in the plan: You have the option of not touching the money inside of your 401(k) plan. If you elect to do this your money is still governed by the rules and guidelines of the 401(k). Every 401(k) plan has what’s called the plan document which lays out the ground rules for how often you can change your investment selection, how often you can withdrawal money etc. You are also limited in your investment options. Typically a 401(k) plan will have 8-15 different options available to choose from. The benefit to this option is that there is no annual maintenance fee (which is typically $40 per year). For these reasons, this option is typically only recommended when an employee has a very small balance in the plan, less than $10,000 in total. Direct Rollover: You have option of establishing a Traditional IRA in which to roll the entire balance of your account into. Since an IRA (Individual Retirement Account) has the same tax benefits of a 401(k) (they are both considered qualified accounts) there are no tax consequences for choosing this option. There is also no 10% tax if you are under 59 ½ since it is a direct rollover. Once the money is in your IRA you have complete control of what you invest your money in (to some degree). For example you can invest in Mutual Funds, Stocks, Bonds, Cash and many of the other traditional investments. For these reasons this is typically the way we recommend people deal with money in old 401(k) plans. Here at Annuity Rate Shopper we have done thousands of 401(k) rollovers and our financial professionals will make sure you make the right decision. If you have any questions feel free to call us at (888) 515-7152 or fill out our Contact Form to have one of our specialists get a hold of you. |