Maintain your tax-deferred benefits by moving your money into an IRA
An excellent way to preserve the tax-deferred benefits of your investment
from your previous employer’s 401(k) plan is to transfer or “rollover” your
money into an IRA. By moving your money into a Rollover IRA, you gain the
following benefits:
- Avoid Paying Federal Taxes and IRS Tax Penalties
“Cashing out” or
taking out all of your money from your previous employer’s 401(k) plan has
negative financial consequences. 20% will be immediately withheld for federal
taxes. Depending on your tax bracket, other federal taxes may apply when you
file your income taxes (additional state and local taxes may apply). In
addition, you must pay a 10% IRS penalty if you are under the age of 59 ½
(additional state penalties may apply). By moving your money into a Rollover
IRA, you pay no taxes or penalties.
- Investment Flexibility
You have the freedom to reallocate and
diversify your investments as you see fit. You can take this opportunity to
rebalance your retirement portfolio to conform your investment strategy.
You also have the possibility of moving your money into a future employer’s
plan. In addition, you can consolidate other retirement money into the Rollover
IRA.
Leave your money in your previous employer’s 401(k) plan.
Keeping your money in your previous employer’s 401(k) plan will help you
maintain the tax-deferred benefits of your retirement savings, but you typically
have less control of your investment options, will not be able to consolidate
with other retirement accounts and may not be able to borrow money from your
plan.
Transfer your money into your new employers plan.
If your new employer offers a 401(k) retirement savings plan, you may be
eligible to roll over your money into the new plan. There are often different
rules and requirements with each plan. You also may not be eligible to
participate in your new employer’s 401(k) plan upon hire and may have to wait
many months before you are able to participate.
Take cash from your 401(k) plan.
You may take all of your money out of your 401(k) plan by taking a lump sum
distribution, but you may lose a substantial amount of your savings in the
process. Once you take all of your money out of your 401(k), you lose your
tax-deferred investment benefits.
Here’s what you can expect if you cash out:
- 20% will be immediately withheld for federal taxes.
- 10 % Early Withdrawal penalty for IRS if you are under the age of 591/2
(additional state penalties, where applicable, may apply).
- Depending on what tax bracket you are in, you may have to pay additional
taxes when you file your yearly income taxes. For example, if you are in the 28%
tax bracket, you will have to pay an additional 8% when you file your income
taxes (20% was already taken in advance when you cashed out). Additional state
and local taxes may also apply. If your tax rate is lower than 20%, you may
receive money back from the federal government when you file your yearly
taxes.
- You no longer have a retirement savings! You no longer have a nest egg and
your money is no longer earning interest! Long-term investment strategy is
sacrificed for short-term gain.
Do the math
If you decide to take a lump sum distribution from your 401(k) plan and you
are under the age of 591/2, and you fall within the 28% tax bracket,
here’s what will happen to your savings balance:
Original Account Balance:
$30,000
20% immediate Federal Tax
Withholding
- $6,000
8% Additional Federal Taxes Due at
Filing
- $2,400
10% IRS Early Withdrawal
Penalty
- $3,000
What’s left
…
$18,600
Not including any additional state penalties or state and local taxes you may
have to pay, it would cost you $11,400 to take all your cash out of your plan!
If you rollover your $30,000 into a Transamerica Premier Funds Rollover IRA, you
get to avoid paying all those taxes or penalties. |
