401k Options When Changing Jobs

What should you do with your old 401k plan if you change jobs? As you know, a 401k or other defined contribution plan is an excellent retirement savings vehicle. You can accumulate a substantial amount of money over many decades providing you let the money grow. With a traditional 401k, you also get the additional benefit of tax-deferred growth. With a Roth 401k, you forego the pre-tax advantage for tax-free withdrawals later in life when you take your money out.

IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out by Twila Slesnick, John C. Suttle Discusses all common types of retirement plans, including 401(k)s and other profit-sharing plans, Keoghs, IRAs and tax-deferred annuities. It covers: tax strategies before and at retirement penalties for taking money out early minimizing taxes distributions you must take distributions to your heirs

Now suppose you have built up an impressive account balance over the years when suddenly you are faced with having to make a difficult decision. Every year, many people obtain new jobs or careers. Along with the excitement of a new transition comes apprehension and uncertainty over what to do with the old retirement plan. Discrepancies and inaccurate advice can cause anxiety for some and catastrophic financial consequences for others.

What you do can have a significant effect on your financial future. One mistake can cost thousands if not hundreds of thousands of dollars or more. The choice you make depends on your personal situation and whether your new employer offers a similar defined contribution plan.

If you have been investing money in your 401k plan for any length of time, you most definitely know about the benefits of tax-deferred growth. You may also be aware of the tax consequences and potential penalties on premature withdrawals if you take your money out early. That said, taking your money out of your old retirement plan is the least favorable option. Here’s why. Say you have an old account balance worth $200,000. If you take it all out in one lump sum to buy a house or whatever, you will owe taxes of approximately $70,000 in addition to a potential penalty of $20,000 leaving you with only $110,000 out of $200,000. If you leave your current job prior to age 55, withdrawals from your 401k are subject to a ten-percent early withdrawal penalty. You should never use the money in your 401k for any reason other than for providing an income during retirement.

If you do not cash it in, what else could you do with it? Maybe you have heard about the possibility of rolling your old 401k account over into your new employer’s plan. Rolling over to a new employer’s plan will preserve your account for retirement with the added benefit of continued tax-deferral. You should consider this option after careful consideration of other factors, such as the investments held outside of your retirement plan and the investment choices available with the new plan as well as your personal situation. One disadvantage with many 401k plans is the lack of quality investment choices within all asset classes. This makes it difficult to construct a well diversified portfolio consistent with every investors risk profile.

Depending on the options available in the new employer’s plan, you may be inclined to leave your money in your old employer’s plan. Letting it remain in the old plan is easy and certainly better than cashing out as described above. Maybe there are better investment options in the old plan than in the new one. The option to leave your money in your old plan or roll it into a new plan depends largely on the quality and quantity of options available in either 401k as compared to an IRA.

The advantages of rolling your old plan into an IRA are continued tax-deferral and a wider range of investment options. Having the entire universe of investment choices makes constructing diversified portfolios a much easier task. There are virtually no limitations. In addition to the advantage of more and frequently better investment options, an IRA offers the potential for significant tax savings for non-spousal beneficiaries. However, those who change jobs frequently may find themselves with several old employer accounts and/or IRAs. It can certainly become more difficult to manage many different retirement accounts making it easier to ruin a well diversified retirement plan.

Each option, leaving the money in the old plan, rolling over to the new plan or rolling into an IRA, has advantages and disadvantages. The right choice depends on each person’s specific financial situation. A thorough review and understanding of plan documentation and assistance from a qualified professional can help to make the decision easier.

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Retirement Investment Planning: roth, keogh, 401k & IRA

Everybody agrees that planning for retirement is important, and the responsibility is increasingly shifted onto your shoulders. You've seen the papers reporting on the imminent death of Social Security, while corporations stampede to endthe secure, old-style retirement benefits in favor of cheaper cash plans. Socking away enough simoleans to carry you through your golden years makes sense, but what type of savings makes most sense for you?

• Important Steps to your Life for Retirement Planning
  So, you are saving up for retirement? That’s great!! You’ve already taken the hardest step- it’s hard to save up money because it’s so fun to spend it! Any money that you are saving for retirement is going to really help in the long run. However, how can you make sure that you are maximizing your retirement funds?

401K plans are popular with employees, and for good reason: they provide a painless way to save for retirement. The way they typically work is that your employer withholds a certain percentage of your salary which is invested straight into your very own investment basket. You never actually touch the money so it's like money you never had, thus decreasing temptation as holiday shopping season arrives. Simply put, it's savings on auto-pilot. A fresh college grad who starts saving 10% of her paycheck at her first job and maintains that habit can be reasonably sure of a comfortable retirement. Switching jobs? No problem, it's your money - you just move it around as you see fit.

However, there are two more big benefits for 401K plans. First, many employers pitch in matching funds. This is essentially free money. Let's say your employer matches the first $1,500 you save each year. In reality, this means you're buying $3,000 for $1,500 - not bad return on investment! There are few iron-clad rules when it comes to investing, but if your employer offer matching funds - save at least up to the matching limit and take the money.

Secondly, 401Ks are tax-deferred. That means you don't pay income tax for whatever you sock away into the plan (up to a limit, see IRS rules for current levels). Instead, you let your money grow without paying a dime to the taxman. Only when you actually start cashing out in your 60s or 70s do you pay tax. This is great news, since it lets your tax-free money compound for year, perhaps for decades. If you're in the 28% tax bracket, it means you have 28 cents MORE to compound compared to a taxable investment. Each year, those extra cents make a bigger and bigger difference.

An IRA, Individual Retirement Account, works similarly, except you set it up yourself. Like the 401K, you can sock away money each year without paying any taxes until you start making withdrawals. Since no employer is involved you don't get any matching funds, nor is the money withheld from your paycheck. You can, however, work with a financial institution (bank, mutual fund company, brokerage etc.) so that the money is automatically deducted from your checking account on payday.

Roth IRAs are a bit different. Here, you pay tax right up front, according to your current tax bracket. However, you don't have to pay taxes as the money grows in your account - and you owe nothing when you start withdrawing funds. Furthermore, you have more flexibility since you are not restricted by a pre-set selection of funds. With a Roth, you set up an account with a broker where you can buy stocks, bonds and whatever else you think will have you ride to the golf course in a Rolls Royce.

Lastly, Keoghs are similar to IRAs for self-employed people, except Keoghs have much higher contribution limits (typically up to $30,000 a year). Keoghs come in three flavors: profit sharing, money purchase and paired Keogh. Each option comes with specific sets of benefits and limitations, so I recommend discussing the matter with your accountant to figure out which option is best for you. On a side note, it is worth mentioning that there is a new option for self-employed that became available in 2002. The Self-Employed 401K has higher contribution limits, fatter catch-up contribution limits and more options for loans against the balance. Make sure to compare all options carefully.

• Senior Years's Financial Planning
  Save and invest money now, for your future. Make investments, keep a savings account strictly for retirement and talk to retirement experts about other ways you can build your income for your senior years. If you make a good living now, consider investing a large portion of the money in your future, rather than spend it on going out to eat and seeing a movie...

So which option is best for you? It depends largely on your current and future tax bracket. Are you currently in a relatively high tax bracket and expect your income to dip significantly once you retire? Then a 401K or IRA is probably for you. But if you're currently in a low tax bracket and you anticipate to be in a higher bracket (make more money) by the time you retire, a Roth may be a better choice. If you're self-employed, a Keogh or Self-Employed 401K is probably the way to go.

Finally, be advised that there are some pretty tough rules surrounding all these options. You should check with your accountant or review the IRS web site for details on rollovers, loans against your funds, emergency withdrawals, contribution limits, earnings phase-outs and a slew of other stuff that may change by the year. As a rule, however, as long as you just save money and wait for the golden years you have little to worry about.

Technorati Tags: Retirement Investment

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Important Steps to Take Every Five Years of your Life for Retirement Planning

The New Rules of Retirement: Strategies for a Secure Future by Robert C. Carlson Proven, profitable, and unique strategies for achieving a financially secure retirement In this step-by-step financial program for retirement, nationally recognized retirement expert Bob Carlson explains why people will need more money than they think during their upcoming retirement, then shows them how to use innovative and carefully researched strategies along with all of their assets to ensure financial security throughout their retirement years.

So, you are saving up for retirement? That’s great!! You’ve already taken the hardest step- it’s hard to save up money because it’s so fun to spend it! Any money that you are saving for retirement is going to really help in the long run. However, how can you make sure that you are maximizing your retirement funds?

Every five years or so, there are a number of things that you can do to make sure that you are on the right track. For example, meeting with a financial planner every few years and taking a look at your financial portfolio would be a very good idea. Looking at your investments such as your liquid savings, your 401K, your IRA, your stocks, etc. with a professional financial planner can really help you. They can give you advice about how your investments are doing, and if you should sell any of your stocks, or if you should change the mutual funds that you have been investing in. They are trained to do this kind of thing, and you are paying them. Make sure they give you adequate time and give you reasons behind their advice. Beware of any financial advisors who want you to sell everything. Some financial planners will want you to do this only so that they can get a commission on the stocks that you sell. If this occurs, get a second opinion.

Another thing to do every five years or so is to challenge yourself to save more. If you’ve been putting 6% of your income into your 401k every year, you should consider trying to move that number up significantly, if possible. You probably have will have gotten raises in that time, and the amount that you can contribute annually will also probably have gone up. Try to go up at least 1 or 2 percent, if possible, every few years. Don’t just put 6% in, and then never raise that number. Your salary increases, and therefore, so should your contributions.

On that same note, you should also check and see if any of your other investments can be contributed to more. For example, usually every year or so, you can contribute more to an IRA. If 5 years ago you were putting $2500 every year into your IRA and now you can afford to put in $3500 and the government allows this, definitely go for it! You don’t always want to put the absolute minimum in.

Most of this is probably common sense. Get financial advice, keep all documents about your finances in a safe place, keep contributing, and if possible, as your income goes up, put more money into your various investments. Even though this seems like common sense, a lot of people ignore their retirement investments because they falsely believe that they will be okay as long as they put SOMETHING into their retirement funds. This is not always true. In fact, most people do not save enough to keep their current lifestyle by any means.

• Senior Years's Financial Planning
  If you’re planning on living a long life, you might want to stop one day and think about how you will get by if you find yourself at the age of 70, 80, or even 90 with no income except social security. How will you pay all of your bills?

The main point is to keep on top of your retirement funds. Make sure that you know all of the newest amounts that you can contribute and make sure that you don’t spend too much of your income. If you can save more, squeeze out the money so that you can contribute so that you can ideally contribute the maximum. Most of the time, companies will contribute up to a certain amount of money for the amount that you put in. Don’t ignore this free money! If you can at least contribute the maximum that your company matches, by all means, do so!

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Basic Investment Strategies

Everyone should have a financial plan that includes long-term investment strategies. These can range from no risk to significant risk, depending on the type of program you decide to invest in.

Guide to Investment Strategy: How to Understand Markets, Risk, Rewards And Behavior by Peter Stanyer, Elroy Dimson With detailed analysis supported by data and anecdotes drawn from investment experiences, this practical guide emphasizes the importance of basing recommendations for investment strategy on the principles of traditional finance.

Before sinking your hard-earned funds into an account that may not hold up during times of economic uncertainty, explore some of the available options to make the best choice for your investment dollars.

The New Investment Superstars: 13 Great Investors and Their Strategies for Superior Returns by Lois Peltz New Investment Superstars provides you with a unique opportunity to get to know these market masters and learn the original investment strategies they have used in many markets to outperform their peers.

The safest type of investment plan is a simple bank savings account. Since the federal government insures most financial institutions of this type, you should not fear losing your deposits or the interest they earn. However, the return on this investment is quite small, especially when the economy slows.

Savings bonds are another safe but slow investment. They mature after seven years, doubling in value. These provide a great option for teaching children how to save by purchasing small bonds and watching them grow over time. Other types of bonds, such as municipal or treasury, are slow-growing and involve little risk.

The next level of investment is the certificate of deposit, or CD. These accrue interest at the prevailing market level, which usually follows the current prime rate. Insured by the FDIC, they provide a safe investment but offer a relatively small rate of return. However, there is no penalty for early withdrawals except quarterly interest, so your money remains “liquid,” or available when you need it.

Individual retirement accounts, or IRA's, are long-term savings plans that, generally speaking, become available (with interest) when a person reaches retirement age. There are penalties in terms of lost interest with early withdrawal.

The Only Guide to a Winning Investment Strategy You'll Ever Need: The Way Smart Money Invests Today by Larry E. Swedroe Contains a new chapter comparing index funds, ETFs, and passive asset class funds, an expanded section on portfolio care and maintenance, the addition of Swedroe's 15 Rules of Prudent Investing, and much more.In clear language, Swedroe shows how the newer index mutual funds out-earn, out-perform, and out-compound the older funds, and how to select a balance "passive" portfolio for the long hail that will repay you many times over.

Purchasing stock shares of a publicly traded company is another way to invest your money to make money when the company does well. Profits are distributed to stockholders as dividends or can be compounded into the stock holding to accrue a greater amount of interest over time. Depending on the company's stability and the economic climate as well as the number of shares you hold, stock holdings can be a volatile or safe investment. Become familiar with the company so you have an idea of what to expect.

Mutual funds are an attractive and popular investment option for long-term moneymaking dividends. A mutual fund is actually a portfolio of varied stocks that is compiled by a broker who advises the client about what to buy, sell, or hold. Since mutual funds include a diversified array of stock shares and compound with interest, they can be a relatively secure investment. But there are low risk, moderate risk, and significant risk options. You can invest in American companies or acquire international portfolios comprising European, Asian, or Pacific Rim stock holdings, for example. Ask a broker for details on the best plan for your interests.

Start saving for the future by investing money in an account that will a rate of return that suits your temperament. You can begin with a savings account, progress to an IRA, and put a little aside for riskier ventures in the stock market. An important rule of thumb is never to invest what you cannot afford to lose.

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Senior Years's Financial Planning

If you’re planning on living a long life, you might want to stop one day and think about how you will get by if you find yourself at the age of 70, 80, or even 90 with no income except social security. How will you pay all of your bills? What about medications and physicians? What if you end up needing long term, or even permanent care? These are vital questions for those who are young now and want to make sure they live well their entire lives, not just in their youths. Imagine living high on the hog for many years, then suddenly finding yourself down and out at an old age, with no money and no place to go. No one wants to face this scenario. Plan now for your future and you’ll have few monetary worries as you get older. If you plan to stop working at 65, but live to be 105, do you have enough money to support yourself for the next 40 years? At $30,000 a year, you’ll need over a million dollars to sustain you at a minimal income.

Save and invest money now, for your future. Make investments, keep a savings account strictly for retirement and talk to retirement experts about other ways you can build your income for your senior years. If you make a good living now, consider investing a large portion of the money in your future, rather than spend it on going out to eat and seeing a movie. There are many other ways to save money or build up a retirement fund. Investments can include property, rare metals or precious jewels, cd’s, collections such as coins or stamps, and even stocks or bonds. Simply saving money might not be enough, since you’ll only accumulate only a little over $70,000 if you save $5 a day for 40 years. Find a retirement specialist and speak with them on occasion for advice on investing and saving for your retirement. Some people also work a part time job and put all of the earnings from the second job in an interest-drawing account for their future.

Another way to make sure you are more secure in your elder years is to work for a long period of time for the same company. Many companies offer a retirement plan if you stay the required amount of years, usually 15 to 30. The retirement plan is important, so make sure you understand it completely. Many retirement plans offer you half of your previous salary after you retire, but some offer the entire salary, some even allowing raises for inflation. Some plans continue to allow you their medical coverage, whereas other plans stipulate that the coverage will end when you retire. And, there’s always a chance that the company will not still be in business in 20 years, leaving you without a retirement plan altogether.

Most people know that it’s a wise idea to have an insurance policy for taking care of their final expenses, but money isn’t the only thing to consider when thinking of retiring comfortably. Having a home that is paid for is also a number one priority. Keep this in mind when considering second or even third mortgages on your home. Plan on having your home paid for in full by the time you reach your 60's, but also know that you’ll continue to have to pay taxes and do repairs on the house.

Make sure you have a current will at all times so that your wishes will be followed when you are gone. Stipulations should be made for your final arrangements, your home, any bank accounts and so on.

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