To roll or not to roll. THAT is the question. Well, that’s the question if you have a
401(k) from a previous employer. If you’ve changed jobs and are wondering
what to do with your 401(k)account, you have four choices: leave it where it is, roll it
into your current employer’s plan, roll it into an IRA, or cash it out. There’s no one right answer for everyone,
but there are a few key considerations that can help you decide: fees, access to your
money, and investment choices.
First up: fees. 401(k) accounts can carry a number of fees,
which differ based on the provider. When it comes to fees, the most important
thing to understand is what you’re paying and whether the features of the plan justify
it. The most common is management fees, which
are associated with the mutual funds or ETFs typically available in retirement accounts.
These are usually expressed as percentages called expense ratios. But there are also plan fees. 401(k)s, for
example, can be loaded with both upfront and hidden costs like admin fees, audit fees,
and asset fees. While these fees can be avoided or reduced
by investing in an IRA, this is not always the case. It’ll ultimately depend on which
brokerage you choose, what funds you invest in, and how often you trade. The thing to keep in mind is while fees can
add up and eat into your retirement savings, it doesn’t mean the cheapest solution is
always the best. Depending on your needs, access to advice, retirement planning tools,
or better investment choices may be worth paying the higher fees.
Another consideration when deciding whether
to roll is when you think you’ll need to access the money. Depending on your age, withdrawal penalties
and conditions may apply. If you think you’ll need to withdraw funds
from your retirement account before the standard 59 Â½ age requirement, you might consider
rolling into your current 401(k). Thanks to an IRS rule known as the rule of
55, if you leave a job any time during or after the calendar year in which you turn
55, you can start taking money out of your current 401(k) penalty-free for any reason. Just know the 59Â½ age requirement still applies
for any money in a previous employer’s 401(k), which means you’ll pay the penalty if you
try to withdraw money early. On top of that, some 401(k)s also allow you
to take out a loan of up to $50,000 from your current account. And you’ll have up to five
years to pay it back. Keep in mind that with an IRA, you can only
withdraw money early for qualified expenses like medical bills and education costs. You
can also withdraw up to $10,000 for a first home purchase. Any other money withdrawn before age 59 Â½
must be repaid within 60 days or you’ll face penalties.
While it’s generally best to keep your retirement
savings invested, your unique circumstances may require you to access your money early,
and this may impact your decision about rolling over.
The third factor to consider is the type of investments each account offers. 401(k)s tend to offer a limited number of
investments chosen by a plan administrator, often mutual funds or exchange-traded funds. These choices sometimes come with high fees, but there are some plans that do offer a variety
of low-cost investments as well as investments that may be unavailable elsewhere. IRAs, on the other hand, tend to offer access
to a much wider variety of investment choices, including individual stocks. One more thing regarding investment choices:
did your previous employer issue company stock through your 401(k)? If the answer is yes
and the stock has grown in value, rolling over could mean serious tax ramifications. If this situation applies to you, talk to
a tax professional to make sure you’re not setting yourself up for a tax surprise next
So there you have it fees, access to your
money, and investment choices. These are three of the biggest considerations
when it comes to deciding whether to roll over a 401(k) from a previous employer. The right choice for you depends on your unique
financial situation. A little research now can help ensure you’re able to thrive in
your golden years..
I am the one and only Susie Orman, and my goal is to make you as independent from financial advisors as possible, because you are never going to be powerful in life until you are powerful over your own money. And my job is to make sure you can achieve just that. So rather than asking more from your money that it can't give you, you have to ask less of your spending habits from yourself which means you have got to get rid of all credit card debt. All debt. Total debt of car loans, mortgage debt, all debt that you have has to go. So one thing that you have to look at is if you have a debt, that is your sign that you can't afford to retire. Maybe you retire from the job that you currently have, but then you have to get some side hustles or something. So my best advice to you is start living below your means but within your needs.
How do you do that? From this day forward, every time you go to make a purchase, ask yourself a question, 'Is this a want or is this a need?'. If it's a want, please don't purchase it. If it's a need, you have to buy it. It's just that simple. You know, a lot of you, when you're approaching retirement, you look at your portfolio and usually your portfolio is this: you have a 401 9k), 403 (b), a Thrift savings plan if you work for the government or whatever, it may be, the military. And now you've retired and now normally you would then do an IRA rollover with that money. But now you're 'Oh my God, what should I do? I never invest in money before, really. I've just put money in every single month into these mutual funds. And now I don't know what to do.'. If you are going to be withdrawing money from your retirement account to pay for your everyday expenses, you have to know that you have — ready for this, everybody — at least three years of expenses in cash, earning you a high interest rate or whatever the highest interest rate is that you can get.
The rest, at this point in time, should really be diversified into high-yield dividend-paying either stocks or exchange-traded funds. If you need really short term money and you want to get a higher interest rate for very short term money, right, I don't have a problem with bills. And, you know, I myself will put a serious sum of money protected in bills because if you're investing more than $250,000, then you really have to go to a variety of banks in order to get FDIC insurance — or even credit unions.
So if you have a large sum of money of $1 – $3 million that you just want liquid, then I use Treasury bills for that. I don't have a problem with that at all. And they keep rolling over but I know that they're guaranteed by the taxing authority of the United States government. If we're talking now, though, about amounts that are $250,000 or below, I think that you're far better off, right here and right now, putting the money in a high-yielding savings account.
So for smaller amounts of money, savings account. For $250,000 or above that you want liquidity and the highest interest rate, I don't have a problem with Treasury bills. You don't have the documents in place today to protect your tomorrows. You don't have a will. You don't have a living revocable trust. You don't have an advance directive and durable power of attorney for health care. And you don't have a power of attorney for finances. You need those things not just to make sure that your assets pass freely to your beneficiaries. You need those things for you. So here you are now and your spouse has died. Who, as you get older, who's going to write your checks for you? Who's going to pay your bills for you? If you get sick, you have an incapacity, who's going to do that? So it's very important that you get the documents that are correct.
Long-term care insurance, if you can afford it, will absolutely protect your little nest egg if one of you ends up in a nursing home. One out of three of you will spend some time in a nursing home after the age of 65. So look around and if you decide to buy long-term care insurance, the perfect age to buy it is really in your 50s. But here's the key. You better know that you can afford a long-term care insurance premium because they're not cheap. From the age of when you buy it all the way until at least 84 because it makes no sense for you to purchase it. Pay for it in your 50s, in your 60s. Now here you are in your mid 70s, you can't afford it anymore and then you drop it. You're better off just not buying it at all. Let me just put it to you bluntly. You are to stay as far away from a reverse mortgage as you possibly can. There is not one situation out there where you should be getting a reverse mortgage.
A reverse mortgage is based on the interest rates that are in effect right here and now. It's based on your age. And it just makes no sense. If you own a home and you can't afford to stay in that home — with real estate prices as high as they are — you could just sell your house right now and either seriously downsize, or there is nothing wrong with renting..Read More