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You work hard today to ensure you get financial security in your retirement. The way you manage your 401(k) plays a vital role in your financial future. Saving into the proper retirement account safeguards your investment and maximizes the returns you make on them. This page shares essential information on 401(k) rollovers.
A 401(k) rollover is the process of transferring the money in your previous employer's 401(k) plan to an existing or new individual retirement account (IRA) or another 401(k) account. When you leave your job, you have a few options for what to do with your 401(k). You can:
Many people forget about the 401(k) plan they had with a previous employer. Thankfully, it's never too late to do a 401(k) rollover, no matter how long it's been since you left the job.
You might choose or forget to roll over your 401(k). Either way, it's not always the best option because you'll be limited to the investment options that your previous employer provides. Furthermore, some employers restrict former employees' 401(k)s from benefits such as reallocation and accessing new investments.
In addition, when you leave your 401(k) with your previous employer, you potentially miss out on alternative tax-advantaged retirement accounts that could cost less in fees and may offer better returns on investment. Monitoring and managing multiple old 401(k)s can also be burdensome.
You can do a 401(k) rollover any time after you leave your job. The process has become easier over the years. You can do a direct rollover, which involves having your previous 401(k) administrator wire funds directly into your new 401(k) or IRA account.
It takes a few hours at most and you may need to make a couple of phone calls. The effort is well worth it. If you roll over your 401(k) to an IRA, you can access more investment options and enjoy more control over your investments.
You incur no taxes when you perform a direct rollover. If you perform an indirect rollover, you're required to deposit the funds into your new IRA or 401(k) account within 60 days of withdrawing the funds from your previous 401(k) account. Failure to do so within the stipulated period means that you'll incur applicable taxes and penalties.
Cashing out your previous 401(k) significantly diminishes your retirement funds because the IRS may charge a 10% early withdrawal fee, and you will owe income taxes on the distribution.
Financial experts recommend saving 10–15% percent of your gross income. The more you earn, the higher the portion of your income you should save. There's no universal formula for determining how much you should save. Some factors to consider include
Ideally, consult a financial advisor and work together with them to find the optimal amount to save for your retirement. The optimal amount achieves a balance that lets you lead a comfortable lifestyle both today and in your retirement.
You can use a spreadsheet or app to calculate your retirement income needs based on the factors discussed above. A retirement calculator can help you determine the progress you've made so far based on your estimated future income. As you make these calculations, make sure your assumptions are correct. Be sure to revisit these calculations from time to time as your circumstances change.
A 401(k) rollover gives you the opportunity to maximize the returns of retirement funds. Working with a professional enables you to make intelligent choices. Get in touch with us at Arizona Capital Management to get started!