401k Rollover — Is It Right For Me?
What is a 401k and How Does It Work?
Let’s start with the basics. A 401k plan is an employer-sponsored retirement plan that allows you to save money for retirement while deferring income taxes on the savings until the time of withdrawal. As an employee, you can opt to have a portion of your income paid directly into the 401k account. Employer-sponsored plans can either be participant-directed (where you choose from a variety of investment options) or trustee-directed (where assets are investment by a board of trustees). Investments typically consist of mutual funds focusing on stocks (including, perhaps, your company’s stock), bonds, and money market funds or stable value investments.
What is a 401k Rollover and When Can It Occur?
A 401k rollover refers to the process of taking the money out of your 401k and moving it into a different retirement plan. This typically takes place when you leave your company or retire, and is also referred to as “separation of service.” There are several rollover option s available to you once you separate from service:
Take the Cash
With a lump-sum payout, you can count on losing a huge chunk of your savings to taxes. If you are over 59 ½ and you choose to cash out the 401k, it will be taxed as current income. Your company will deduct 20% of your savings and hand it over to the IRS as a pre-payment on your income taxes. If you choose to reinvest you will have a lot less money to work. If you are under 59 ½, you may be forced to pay a 10% “early withdrawal” penalty, in addition to the 20% paid to the IRS. If you take the cash all at once, you will be required to report the entire amount on your income taxes for that year. This amount, in addition to your other annual earnings, can bump you into a higher tax bracket. In either case, cashing out your 401k is generally one of the worst decisions you can make when it comes to optimizing your retirement dollars.
Leave the Money in the 401k
When some people leave their job or retire, they leave their money in their 401k plan. Your current company is obligated to let you keep your money in its plan, even if you leave, as long as it exceeds $3,500. If you go to a new employer, you can usually transfer your old 401k money into the new employer’s 401k account. You will now have the advantage of one account statement instead of two, and your investment options will be different in the new plan. But keeping your money in the 401k is, next to cashing out, the second worst thing you can do with you retirement money. The money is still restricted to a defined set of investment options dictated by your company’s plan. All 401k plans have limited investment options, no safeguards against losing your principle, and no income protection for your retirement years
Advantages of the 401k Rollover Annuity:
- Guaranteed Principal: Principal is guaranteed with a 401k rollover annuity, while principal is not guaranteed with mutual funds, stocks, or bonds associated with your 401k or IRA investment.
- Flexibility: When you roll your 401k plan into an IRA within a variable annuity, you have the power to change your investments depending on the investment climate or your personal goals. For example, you can select a fixed interest rate account, or have the option of splitting up your account between market indices, actively managed funds, asset allocation models and fixed interest account(s).
- Income Protection: With the best variable annuities with living benefit riders or immediate annuities with life contingencies, you cannot outlive your money. As long as you are alive, the insurance company is obligated to send you a check every month.
- Death Benefit Protection: With the top deferred variable annuities, for an additional fee (usually 0.25% to 0.75% per year), most insurance companies offer what are referred to as “Enhanced Death Benefits.” These benefits vary from 3% to 7% on either a simple interest or compounded roll-up that grow to age 80, 85 or even 90, or the highest monthly, quarterly or annual account value. A couple of companies will even lock in the highest anniversary value and then pay you 5% or 6% off of the new, higher value.
Roll It Into an IRA
Roll it Into an Annuity