Were you recently laid off or switched jobs? You may be wondering what to do with your 401(k). Do you leave the account behind, withdraw it, or roll it over to another plan? Here are some factors to consider:
The Benefits of 401(k) Rollovers
Rolling your 401(k) over into an IRA can prove to be a wise financial move in the long term and help you avoid steep early withdrawal penalties. You can choose from two types of IRAs: Traditional or Roth. Or you can roll over your 401(k) into your new employer’s 401(k) plan.
Traditional IRA
If you choose this route, you won’t be taxed when the 401(k) proceeds are rolled over. Plus, earnings accumulate without tax implications. Traditional IRAs are most ideal for individuals who expect to be in a lower tax bracket when they retire.
Why so? You will be subject to taxation when you begin taking distributions (withdrawals). However, the taxes you pay in retirement will be less than you’d pay if you were still employed, assuming you’re in a lower tax bracket in retirement.
Roth IRA
Is there a chance you’ll be in a much higher tax bracket at retirement? A Roth IRA may be a better option. You will pay taxes when the 401(k) proceeds are rolled over to a Roth IRA. This amount is usually deducted from your account, so it won’t have to come out of pocket.
But unlike with traditional IRAs, the withdrawals you take from a Roth IRA during retirement will not be subject to taxation.
Roll Over Your 401(k) Into Your New Employer’s Plan
This option also allows you to avoid taxation and early withdrawal penalties. However, you want to consult with your new employer to confirm this option is available. Not all employer-sponsored plans permit transfers from outside 401(k) plans.
When and How to Roll Over Your 401(k)
There’s no right or wrong choice regarding 401(k) rollovers. It depends on your personal situation. However, there’s a crucial mistake you want to avoid – withdrawing from your retirement account early.
Even if you have good intentions for the money, the IRS doesn’t care. You will subject to harsh penalties, which include:
- A 10% penalty if you’re not at least 59 ½ years of age
- Federal income taxes on the amount of the distribution
The tax hit and early withdrawal fee may not seem like a big deal, but you’ll be losing money and robbing yourself of future earning potential that could materialize as a result of compounding interest. In some extreme cases, you may be able to take a penalty-free withdrawal.
Your best bet is to communicate with the plan administrator that you’ll be rolling the funds over into an IRA or your new employer’s 401(k) account. This alerts them not to issue you a check for the amount that’s in your 401(k) account, minus the federal taxes and the 10% penalty. You will also be prompted to complete a Direct Rollover Form.
Give Your Nest Egg a Boost
Investing in your future is a wise financial move. Building your nest egg through a traditional or Roth IRA is a great place to start. But it isn’t your only option.
Consider opening a Managed Investment Account with MoneyLion to make your money work hard for you. It’s a stress-free way to start investing, minus the trading and management fees that you’ll find with other firms. Plus, there’s no minimum investment to use the feature.
Automated investing is also available if you’d prefer to simplify the process. Put your investing on autopilot by setting up an automatic transfer from your checking account to your MoneyLion investment account. You can invest $5 or more on a weekly, biweekly or monthly basis.
Open a Managed Investment Account
How to Set Up Free Managed Investing
Ready to give the fully managed investing feature a try?
It’s easy to get up and running and MoneyLion takes care of everything. Simply sign up for a fully managed investment account from MoneyLion. You will be asked a series of questions to help MoneyLion select a portfolio that closely aligns with your preferences and investment goals.
Wondering what portfolios are available? MoneyLion will recommend one of the following ETF portfolios for you, and you can make adjustments if you choose:
- Steady income portfolio
- Conservative portfolio
- Moderately conservative portfolio
- Moderate portfolio
- Moderately aggressive portfolio
- Aggressive portfolio
- Equity only portfolio
Your account will be monitored continuously. If needed, adjustments will be made to ensure your portfolio remains aligned with your goals.
Get started with a Managed Investment Account from MoneyLion today to begin building a bright financial future.
