401k Withdrawals

401k Withdrawals After Changing Jobs – What Now?

Throughout life we all experience changes. I heard a quote once from a wise man who said “When things are really bad things will change and when things are really good things will change as well.” Change is our lives and we must accept that. Now, what does this have to do with your 401k?

Well, when you hear those words “You’re fired!”, maybe you just get laid off as a large business reduction, or just changing jobs, one of the first things you are going to think about is how are you going to live? Here is where your 401k comes into consideration. Your 401k plan is most likely the largest asset other than your house you currently have and is a lot more liquid than your house, meaning you can get money out of it much easier. *Updates have been made to 401k contribution limits 2017*

However, 401k plans have a lot of rules and taxes come into play once you make the decision that you need to tap into your retirement savings. Before you start making 401k withdrawals ask yourself these questions:

4 Questions to Consider Before 401k Withdrawals

1.) What places can I get money now to supplement my income?
– Well if you were laid off or fired there is a good chance you can get unemployment income to offset what your job couldn’t produce and this will help keep your hands off of your 401k. Also, think about home equity lines of credit or credit cards as well. These are always only short term fixes and should be able to hold you over for a few months. You should always have emergency assets like these planned in case you do lose your job.

2.) Can I cut back on any expenses?
– Would you really keep living the same lifestyle if you were just fired? I highly doubt it. However, you would be surprised how much people don’t really cut back because they see the large 401k balance looming in front of them. Make sure you cut EVERY corner before tapping into your 401k.

3.) What is my income level (tax bracket) going to be for this year?
– Why is this important? Well, if you cannot cut back on expenses and you are maxed out on lines of credit, a 401k distribution may be the one thing preventing you from bankruptcy (in some cases bankruptcy isn’t all that bad, we’ll get to that later). Basically, if you make less money you pay less to Uncle Sam. If you get fired in October, well your income bracket will still be high and it would probably be advisable to wait until January 1 to make your 401k withdrawals. However, if you get fired earlier in the year, you may not get hit too hard by taxes. If you were going to make your 401k withdrawals, that would be the time to do it.

Penalties Explained From 401k Withdrawals

If you take a 401k distribution you will be taxed at your income bracket and there will probably be a 10% early withdrawal penalty. You must keep in consideration that any money you take will be income. For example:

If you made $34,000 for 2011, that puts you into a 15% tax bracket considering you file single. Now with the standard deduction that puts your income at around $29,000 or so. Now, the 25% bracket is for people making $34500 and above. So lets say you make a $10,000 withdrawal from your 401k plan:

First of all, your plan will withhold 20% of the withdrawal for taxes (this is an IRS requirement and cannot be avoided unless you do a Rollover 401k to IRA), which brings your check amount to $8,000 considering there is no mandatory state tax. Now, here is what you actually pay:

There would be $5,500 taxed at 15% – $ 825
Now, since extra $4,500 put you above the 15% bracket, that is taxed at 25% – $ 1125
And there will be that 10% penalty on the full withdrawal amount of $10,000 – $ 1000

So, in this scenario, to get $10,000 you are having to give the IRS $2,950 of your hard earned money. This isn’t even looking at state taxes, this is only federal. That is 29.5% of your hard earned money that is gone, never to be seen again.

401k Rollover to IRA

4.) What are my 401k plan rules?

– Does your 401k plan actually allow you to take partial withdrawals or do you have to take out the full balance? All plans have different rules and a lot of plans don’t even allow partial withdrawals. They surely won’t offer a loan because you aren’t working for the company anymore. So, what is your next best alternative? Initiate a 401k rollover to an IRA and use the rollover IRA to take partial withdrawals from.

Most investment firms offer free IRAs or you can go to your local bank and put your money in a money market IRA. Also, rollover IRA accounts do not restrict you on the amount of partial withdrawals you can make and there is no mandatory 20% federal tax withholding on 401k withdrawals, so it may be a better option depending on your circumstances. Also, you can usually do a 401k rollover and then rollover the money from the IRA account into your new companies 401k when you find that job.

Use our 401k Calculator to see negative effects of taking money from your 401k plan have on your long term future.

rollover 401k to IRA

Rollover 401k to IRA?

What do I need to figure out before I decide on initiating a rollover 401k to IRA?

There are many factors involved before deciding on rolling over your 401k into an IRA.

4 Things To Know Before You Rollover 401k to IRA

1. What are the fees involved in keeping the 401k plan or rolling it over to an IRA? You need to make sure you are not going to be paying an exorbitant amount of fees with your new retirement accounts.

2. What matters more to me? The ability to have many more investment options and the ability to use a financial advisor to guide me on how to invest and how much to save, or would I rather be more limited to my investments in the 401k plan and pay less fees but have to manage everything myself?

3. Do I need to consolidate my assets together and be able to have a retirement account to make IRA contributions to? Remember, many times a 401k rollover to an IRA is not a reversible thing and if you do not know all of the facts you could be hurting yourself.

“4.Would it be better to roll my old 401k plan into my new employers 401k account?”

This is beneficial if you think you may want to use the 401k money you have to buy a house or maybe just use it to pay down some of your debt. Many 401k plans offer 401k loans and right now the interest rate is very low, and keep in mind the interest if only paid to yourself. If you cannot pay back the loan you will pay taxes on the money and probably a penalty, however if you do pay it back you have only paid interest to yourself and will not have any tax consequences. On the other hand, if you initiate a 401k rollover into an IRA, you cannot take a loan from an IRA account and will have to make a withdrawal.

The ability to take loans is a great beneficial factor in consolidating your 401k assets into your current plan, however if you do not need the money, more than likely the IRA, with the ability to provide more investment options, will be your best long term retirement strategy. Related Tools: 401k calculator

401k Contribution Limits 2018 – Why Contribute?

The 401k contribution limits 2018 remain the same as 2016(401k contributions limits 2018 are listed below). A 401k plan is a retirement plan set up by your employer for your benefit. The employer is benefited by special tax treatment from the IRS and is able to give matching contributions to employees because of the federal governments incentives. Also, employers want you to contribute to your 401k to be happy and stay at their company for many years. Many employers use 401k plans and lecture about 401k contributions to increase employee moral. Also, 401k matching contributions are free money.

The IRS has certain limits on the amount of money that you can put into your 401k. For most people this is not an issue, however some people who make too much money or people who are considered “highly compensated employees” or HCE are not able to contribute as much as the average person working for the company. The reason the IRS sets limits on how much you can contribute is that the money you put into the plan goes in on a pre-tax basis, meaning the government gets no money from the money you put into the 401k plan, they cannot tax it until you take it out.


Here Are The 401k Contribution Limits 2018:

$18,500 for age 49 & under

$24,500 for age 50 & above ($6,000)

note: 401k contribution limits 2018 were updated on September, 5th 2018


 

401k Contribution Limits 2017 Company 401k Match

This is just considering the money that YOU put into the plan, it is not considering the 401k matching contribution that your employer puts in on your behalf. Each plan is separate, but an example of how an employer matches is as follows: “Your Company 401k Match is 6% dollar for dollar up to $3,000 per year”

So, this means that if you make $40,000 and contribute 6% to your 401k plan (not to exceed 401k contribution limits 2018) you are putting in $92 per pay period considering you get paid bi-weekly or 26 times per year. Also, since your employer matches 6% of your contributions, you get $184 contributed to your 401k plan each pay period.

So, in this example it is like you putting in 12% of your pay.

However, if you put in 10% of your pay, that comes out to $153 per pay period, the company will only put in $92 because that is 6% of your pay and they will not match the extra 4% you went over. This isn’t necessarily a bad thing, it just means you have maxed out the free money the company is providing you. Try it yourself with our 401k calculator! Remember not to exceed 401k contribution limits 2018 while using the 401k calculator.

Company 401k match of contributions are the biggest reason why people want to contribute to their 401k plan. The pre-tax benefit of the contribution is also very helpful, but nothing beats free money. Like everything in life though, the matching contributions comes with a caveat. This is what we call vesting.

Different Ways Your Company 401k Match May Vest

Vesting in its basic sense means the amount of money that you actually have in your 401k or the amount of money that is yours. When you work for a company you become vested in their matching contributions after a certain number of years and it is up to your 401k plan rules to determine this.

Example: Company 401k Match Called a Gradual 5 year Vesting Schedule:

  • 1 year – 20%
  • 2 years – 40%
  • 3 years – 60%
  • 4 years – 80%
  • 5 years – 100%

What this means is that if you leave the company after 2 years of service you get to keep 40% of the money they put in for you and 100% of the money you put in for you. Remember, you are ALWAYS 100% vested in the money you put into the plan and nobody can take that money from you but you. But, the company is able to set rules on their contributions and if you leave before the set period of time that extra money goes back into the company’s pocket. This is a great way for the company to hold on to its employees for the long haul. Most companies do not have a vesting schedule over 6 years.

So What if I Cannot Afford to Contribute to My 401k?

The answer to this is simple, if your company matches your contributions you can NEVER afford to not contribute money to your 401k plan. This is free money and even if you are only 20% vested this is money that the company is giving you just because you are funding for your future. Also, if things get into a real bind most plans allow for you to take a 401k loan from your plan, meaning you can borrow from your vested balance, which usually is 50% of that amount and usually at a very low interest rate with all of the interest being paid back to you.

So, in short, not making enough money is never an excuse to not put money into your 401k.

If you have had multiple jobs, the 401k plan is easily seen as the easiest way to save money. Have you ever tried to save money in a bank savings account only to see the balance dwindle to nothing in a year? Well, that is the problem with money that is easily attainable, because you WILL spend it on things you do not need now and this will hurt you very much in the long run. For this exact reason the government has enacted IRS tax laws on 401k plans and IRA accounts to make it not worth your while to take money from them and in many cases if you are working for the company you cannot take money from the plan, you must either take a loan or file for a hardship.

Example of The Impact of a Company 401k Match

You might not be exceeding the 401k contribution limits 2018, so in this example we’ll use reasonable numbers to show the impact of your 401k contributions can make on your portfolio. Here is the final example of the person contributing $40,000 at 6% of his pay with the company matching 6%. Also, we are considering he is 25 years old and is aggressive currently, meaning on average he should earn 9% on his money over the next 30 years until he retires at age 55 (the minimum age to take money from a 401k plan without a penalty and not considering a 72T).

His final amount at age 55 – $732,312.12.

This figure is from him putting in $92 of his own money, before taxes, each pay period for 30 years. His company is also matching him dollar for dollar on each contribution since it falls within their matching contribution limits. If that doesn’t make you want to rethink that new pair of tennis shoes I don’t know what will.

Now you can see the impact of a company 401k match and huge amounts of money that you could be missing out on. If you can reach the 401k contribution limits 2018 go for it! Albert Einstein stated that compound interest is the most power force in the universe. Take advantage of your company 401k match and get contributing!

company sponsored 401k retirement plan

Should I invest in my Company Sponsored 401K Retirement Plan?

Should I invest in my Company Sponsored 401K Retirement Plan?

Should I invest in my company’s 401k plan? The answer is YES!!! Take advantage of your company sponsored 401k retirement plan.

Government programs for retirement income, like social security, are becoming very unpromising. And retirement healthcare has been so up in the air lately in the political world. So many changes…who can keep track?! And Company paid Pension Plans are almost extinct now, too!

Well one thing that I do know is that no one is guaranteed to pay for your future…except for you!

 

Reasons why to invest in your company sponsored 401k retirement plan

  • Most plans have a match % (which means they give you the matched amount for FREE! If you don’t invest at least the matched amount, you are missing out on free money!
  • The money is invested pre-tax, out of your paycheck before the taxes are taken out.
  • Yes, the plan is often based on funds that are based on the stock market (so there is some risk involved), but that means the potential for growth is big! Remember, the bigger the risk, the bigger the potential returns.
  • You do usually have the power to choose your risk and diversify! Many companies offer “safer” choices for employees nearing retirement (usually funds recommend to have more aggressive investment strategies when you are younger, and safer ones as you get older.
  • The fund always has an investment manager or help person that you can ask questions to! They can help you pick what is best for you, your family and your future!
  • You can use our free 401k calculator to find out how much money you should be saving, based on your age and expenses.

Have you been putting any money into your 401k, yet? Do you wish you would have started sooner?