8 401(k) Investing Tips to Maximize Your 401(k)

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The best kind of 401(k) plan is one that is used. The employer-sponsored retirement plan is typically easy to open and fund (with pre-tax dollars often deducted straight from your paycheck), and offers tax benefits vs. saving and investing in a brokerage account. Understanding the nuances of this all-important savings vehicle may help catapult investors […]

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How to Create Your Own Retirement Plan

One of the good things of working for a company is that they create a retirement plan for you. As an employee, you don’t have to do anything else but to participate in the plan. However, when you’re self-employed or a small business owner, you’re responsible of setting up your own retirement plan. When it …

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How To Retire At 50: 10 Easy Steps To Consider

Can you retire at 50? On average, people usually retire at 65. But what if you want to retire 15 years earlier than that like  at 50? Is it doable? Below are 10 easy steps to take to retire at 50.  Retiring early can be challenging. Therefore, SmartAsset’s free tool can match you with  a …

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How to Transfer Your 401(k) When Changing to a New Job: 401(k) Rollover Guide

It’s easy to forget about old 401(k) plans when changing to a new job. Some people simply forget about it because the company that manages it never reminds them. Others didn’t forget about their old account, but they’ve been putting off the rollover because it sounds hard. Many companies don’t make the process easy for […]

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Strategies for Avoiding and Reducing Taxes

Taxes can take a big bite out of your income, especially if you’re in a higher income tax bracket. And even with careful planning, it’s possible that you could still be hit with an unexpected tax bill. The good news … Continue reading →

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5 Options for Your Retirement Account When Leaving a Job

One of the most common retirement questions I receive is what to do with a retirement account when leaving a job. Knowing your options for managing a retirement plan with an old employer is essential because most people change jobs many times throughout their careers. And millions of Americans remain out of work during the pandemic.

When you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave.

Fortunately, when you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave. It doesn't matter if you quit, get fired, or get laid off, the same rules apply. 

This post will cover five options for managing your retirement account when your employment ends. You'll learn the rules for handling a retirement plan at an old job and the best move to create a secure financial future.

Why should you use a retirement account?

Investing money using one or more retirement accounts is wise because they come with terrific tax advantages. They defer or eliminate the tax on your contributions and investment earnings, which may allow you to accumulate a bigger balance than with a taxable brokerage account.

Investing money using one or more retirement accounts is wise. If you have a retirement plan at work but aren't participating in it, now's the time to enroll!

So, if you have a retirement plan at work but aren't participating in it, now's the time to enroll! Contribute as much as you can, even if it's just a small amount. Make a goal to increase your contribution rate each year until you're putting away at least 10% to 15% of your pre-tax income.

FREE RESOURCE: Retirement Account Comparison Chart (PDF)—a handy one-page download to see the retirement account rules at a glance.

What is a retirement account rollover?

Don't make the mistake of thinking that once you leave a job with a 401(k) or a 403(b) you can't continue getting tax breaks. Doing a rollover allows you to withdraw funds from a retirement plan with an old employer and transfer them to another eligible retirement account.

When you roll over a workplace retirement account, you don't lose your contributions or investment earnings. And if you're vested, you don't lose any money that your employer may have put into your account as matching funds.

The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process.

The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process. If you miss this deadline and are younger than age 59½, the transaction becomes an early withdrawal. That means it is subject to income tax, plus an additional 10% early withdrawal penalty.

If you're a regular Money Girl podcast listener or reader, you know that I don't recommend taking early withdrawals from retirement accounts. Paying income tax and a penalty is expensive and reduces your nest egg.

If you complete a traditional rollover within the allowable 60-day window, you maintain all the funds' tax-deferred status until you make withdrawals in the future. And with a Roth rollover, you retain the tax-free status of your funds.

What are your retirement account options when leaving a job?

Once you're no longer employed by a company that sponsors your retirement plan, there are four options for managing the account. 

1. Cash out your account

Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option. As I mentioned, taking an early withdrawal means you must pay income tax and a 10% penalty. 

Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option.

Let's say you have a $100,000 account balance that you cash out. If your average rate for federal and state income taxes is 30%, and you have an additional 10% penalty, you lose 40%. Cracking open your $100,000 nest egg could mean only having $60,000 left, depending on how much you earn.

Note that if your retirement plan has a low balance, such as $1,000 or less, the custodian may automatically cash you out. If so, they're required to withhold 20% for taxes (although you may owe more), file Form 1099-R to document the distribution, and pay you the balance. 

2. Maintain your existing account

Most retirement plans allow you to keep money in the account after you're no longer employed if you maintain a minimum balance, such as more than $5,000. If you don't have the minimum, but you have more than the cash-out threshold, the custodian typically has the authority to deposit your money into an IRA in your name.

The downside to leaving money in an old retirement account is that you can't make additional contributions because you're not an employee. However, your funds can continue to grow there. You can manage them any way you like by selling or buying investments from a set menu of options.

The downside to leaving money in an old retirement account is that you can't make additional contributions.

Leaving money in an old retirement plan is certainly better than cashing out and paying taxes and a penalty, but it doesn't give you as much flexibility as you you would get with the next two options I'm going to talk about.

I only recommend leaving money in an old employer's retirement plan if you're happy with the investment choices and the fund and account fees are low. Just make sure that the plan doesn't charge you higher fees once you're no longer an active employee.

Another reason you might want to leave retirement money in an old employer's plan is if you're unemployed or have a job that doesn't offer a retirement account. I'll cover some special legal protections you'll get in just a moment.

3. Rollover to an Individual Retirement Arrangement (IRA)

Another option for your old workplace retirement plan is to roll it into an existing or new traditional IRA. If you have a Roth 401(k) or 403(b), you can roll it over into a Roth IRA. The deadline to complete an IRA rollover is 60 days.

Your earnings in a traditional IRA would continue to grow tax-deferred, just like in your old workplace plan. And earnings grow tax-free in a Roth IRA, like a Roth account at work. 

Here are a couple of advantages to moving a workplace plan to an IRA:

  • Getting more control. You choose the financial institution and the investments for your IRA.  
  • Having more flexibility. With an IRA, there are more ways to tap your funds before age 59½ and avoid an early withdrawal penalty than with a workplace account. That rule applies to several exceptions, including using withdrawals for medical bills, college expenses, and buying or building your first home.

Here are some downsides to rolling over a workplace plan to an IRA:

  • Having fewer legal protections. Depending on your home state, assets in an IRA may not be protected from creditors.  
  • Being ineligible for a Roth IRA. When you're a high earner, you may not be allowed to contribute to a Roth IRA. However, you can still manage the account and have tax-free investment earnings.

If you want more control over your investment choices, think you'll need to make withdrawals before retirement, are self-employed, or don't have a job with a retirement plan to roll your account into, having an IRA is a great option.

4. Rollover to a new workplace plan

If you land a new job with a retirement plan, it may allow a rollover from your old plan once you're eligible to participate. While the IRS allows rollovers into most retirement accounts, employer plans aren't required to accept incoming rollovers. So be sure to check with your new plan administrator about what's possible. 

Once you initiate a transfer from one workplace plan to another, you must complete it within 60 days to avoid taxes and a penalty.

Here are some advantages of doing a workplace-to-workplace rollover:

  • More convenience. Having all your retirement savings in one place may make it easier to manage and track.  
  • Taking early withdrawals. Retirees can begin taking penalty-free withdrawals from workplace plans as early as age 55.  
  • Avoiding Roth income limits. Unlike a Roth IRA, there are no income restrictions for participating in a Roth workplace retirement account.  
  • Getting more legal protections. Workplace retirement plans are covered by the Employee Retirement Income Security Act of 1974 (ERISA), a federal regulation. It doesn't allow creditors (except the federal government) to touch your account balance.

Some downsides to transferring money from one workplace plan to another include:

  • Having less flexibility. You can't take money out of a 401(k) or a 403(b) until you leave the company or qualify for an allowable hardship. It doesn't come with as many withdrawal exceptions compared to an IRA. 
  • Getting less control. You may have fewer investment choices or higher fees than an IRA, depending on the brokerage firm. 

5. Rollover to an account for the self-employed

If you left a job to become self-employed, having an IRA is a great option. However, there are other types of retirement accounts that you might consider, such as a solo 401(k) or a SEP-IRA, based on whether you have employees and on your business income. 

Read 4 Ways to Start a Retirement Account as a Self-Employed Freelancer or 5 Retirement Options When You're Self-Employed for more information. 

When is a Roth rollover allowed?

For a rollover to be tax-free, you must use a like account. For example, if you have a traditional 403(b), you must rollover to another traditional retirement account at work or to a traditional IRA.

If you move traditional, pre-tax funds into a post-tax, Roth account, you must pay income tax on any amount that wasn't previously taxed. That could leave you with a massive tax liability. If you want a Roth, a better move would be to open a Roth account at your new job or to start a Roth IRA (if your income doesn't make you ineligible to contribute). 

Where should you move an old retirement account?

The best place for your old retirement account depends on the flexibility and legal protections you want. Other considerations include the quality of your old plan, your income, and whether you have a new job with a retirement plan that accepts rollovers.

The best place for your old retirement account depends on the flexibility and legal protections you want.

The goal is to position your retirement money where you can keep it safe and allow it to grow using low-cost, diversified investment options. If you have questions about doing a rollover, get advice from your retirement plan custodian. They can walk you through the process to make sure you choose the best investments and don't break the rollover rules.

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How the Sandwich Generation Can Protect Their Retirement

Woman part of the sandwich generation

For those who are caring for their aging parents and raising kids at the same time, it can often seem like there’s never enough time, money, or energy to provide for all the family members who need you. In particular, handling finances when two different generations are relying on you can feel like an impossible balancing act — not to mention an exercise in feeling guilty no matter what you do.

But being the caregiver sandwiched between two generations makes it even more important for you to prioritize your own financial needs, especially when it comes to retirement planning. By protecting your retirement during this difficult season of your life, you’ll be in a better place to remain independent as you age, launch your kids into a more secure adulthood, and offer ongoing support to your parents.

Sound impossible? It’s not. Here’s how you can protect your retirement if you’re a member of the sandwich generation.

Retirement savings comes first

Retirement savings should get priority ahead of putting money into your kids’ college funds. You know that already. Your kids can take on loans for college, but there are no loans available to pay for your retirement.

The more difficult decision is prioritizing retirement savings ahead of paying for long-term care for your parents. That can feel like a heartless choice, but it is a necessary one to keep from passing money problems from one generation to the next. Forgoing your retirement savings during your 40s and 50s means you’ll miss out on long-term growth and the benefits of compound interest. By making sure that you continue to set aside money for retirement, you can make sure your kids won’t feel financially squeezed as you get older.

Instead of personally bankrolling your parents’ care, use their assets for as long as they last. That will not only allow you to make the best use of programs like Medicaid (which requires long-term care recipients to have exhausted their own assets before it kicks in), but it will also protect your future.

Communication is key

Part of the stress of being in the sandwich generation is feeling like the financial burdens of two generations (as well as your own) are resting entirely on your shoulders. You feel like you’ll be letting down the vulnerable people you love if you can’t do it all. But the truth is that you can’t do it all. And you shouldn’t expect that of yourself, nor should your family expect it of you. So communicating with your loved ones about what they can expect can help you draw important boundaries around what you’re able to offer them.

This conversation will be somewhat simpler with your children. You can let them know what kind of financial help they can expect from you for college and beyond, and simply leave it at that.

The conversation is a little tougher with your parents, in part because you need to ask them about nitty-gritty details about their finances. Whether or not money is a taboo subject in your family, it can be tough for your parents to let you in on important financial conversations — to them it feels like they were changing your diapers only a few short years ago.

Being in the loop on what your parents have saved, where it is, what plans they have for the future, and who they trust as their financial adviser, will help protect their money and yours. You’ll be better able to make decisions for them in case of an emergency, and being included in financial decisions means you can help protect them from scams. (See also: 5 Money Strategies for the Sandwich Generation)

Insurance is a necessity

Having adequate disability insurance in place is an important fail-safe for any worker, but it’s especially important for those who are caring for aging parents and young children. The Council for Disability Awareness reports that nearly one in four workers will be out of work for at least a year because of a disabling condition. With parents and children counting on your income, even a short-term disability could spell disaster, and force you to dip into your retirement savings to keep things going. Making sure you have sufficient disability income insurance coverage can help make sure you protect your family and your retirement if you become disabled.

Life insurance is another area where you don’t want to skimp. With two generations counting on you, it’s important to have enough life insurance to make sure your family will be okay if something happens to you. This is true even if you’re a full-time unpaid caregiver for either your parents or your children, since your family will need to pay for the care you provide even if they aren’t counting on your income.

It’s also a good idea to talk to your parents about life insurance for them, if they’re able to qualify. For aging parents who know they will draw down their assets for long-term care, a life insurance policy can be a savvy way to ensure they leave some kind of inheritance. If your parents are anxious about their ability to leave an inheritance, a life insurance policy can help to relieve that money stress and potentially make it emotionally easier for them to draw down their own assets.

Become a Social Security and Medicare expert

Spending time reading up on Social Security, Medicare, and other programs can help you to make better financial decisions for your parents and yourself. There are a number of misconceptions, myths, and misunderstandings masquerading as facts about these programs, and knowing exactly what your parents (and eventually you) will be entitled to can help make sure you don’t leave money on the table or make decisions based on bad information.

The eligibility questionnaires at benefits.gov can help you determine what benefits are available and whether your parents qualify. In addition, it’s a good idea to sign up for a my Social Security account for yourself. This site will provide you with personalized estimates of future benefits based on your lifetime earnings, which can better help you prepare for your own retirement.

Don’t be afraid to ask for help

Caring for children and parents at the same time is exhausting. Don’t compound the problem by thinking you have to make financial decisions all by yourself. Consider interviewing and hiring a financial adviser to help you make sense of the tough choices. He or she can help you figure out the best way to preserve your assets, help your parents enjoy their twilight years with dignity, and plan for your children’s future.

Even if a traditional financial adviser isn’t in the cards for you, don’t forget that you can ask for help among your extended family and network of friends. There’s no need to pretend that juggling it all is easy. Family can potentially offer financial or caregiving support. Knowledgeable friends can steer you toward the best resources to help you make decisions. Relying on your network means you’re less likely to burn out and make disordered financial decisions. (See also: 9 Simple Acts of Self-Care for the Sandwich Generation)

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Are you part of the sandwich generation? When you are a caregiver to children as well as aging parents, it can seem like theres not enough time, money or energy to provide for all the family members. Here are the tips and ideas on how you can protect your retirement finances. | #sandwichgeneration #personalfinance #moneymatters


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What Is a Roth IRA?

When you think about retirement planning, you may feel like you’re doing alright, especially if you’re contributing part of your monthly paycheck to your employer-sponsored 401(k) plan. You may even have visions of growing old…

The post What Is a Roth IRA? appeared first on Crediful.

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