by Daniel Kittell | Accounting News, News, Newsletter, Retirement, Retirement Savings
When you retire, you don’t have to move your 401(k) right away, and for many retirees, leaving it where it is could be a smart move. Employers are increasingly adding features that make staying in the plan more appealing. Why? Partly because when employees with large balances leave their money in the plan, it helps lower overall fees for both the company and participants. But before you make a decision, it’s worth understanding your options.
Most Retirees Can Leave Their 401(k) Where It Is
More than half of American workers don’t realize that most plans allow them to leave their 401(k) in place after they stop working.
The key word in that sentence is most. If your balance is under $1,000, your plan may automatically close the account and issue a check. If you don’t deposit that into another qualified retirement account, such as an IRA, it counts as a distribution and may be taxed. You could also incur a 10% early withdrawal penalty.
Additionally, if your balance is under $7,000, your employer may roll it into an IRA for you. Otherwise, your funds can stay put, and you can access it when needed, depending on your plan’s rules.
What’s Changing in 401(k) Plans?
In the past, many plans required retirees to withdraw the full balance or roll it over to an IRA. Now, according to a 2025 Vanguard study, 68% of plans allow retirees to set up installment payments from their accounts (up from 59%), and 43% allow partial, as-needed withdrawals (up from 16%).
These features give retirees more flexibility, but they’re not offered through all plans, so it’s important to check with your plan provider before making a decision to withdraw funds.
Should You Roll Over to an IRA?
Rolling your 401(k) to an IRA may get you a wider range of investment choices, and in some cases, lower fees. But with that flexibility comes responsibility. You’ll need to manage your own money or hire someone to do it for you.
Before moving your money, consider investment options in both accounts, fees (both visible and hidden), your comfort level with managing investments, and whether you anticipate needing regular withdrawals.
Annuities in 401(k)s
Some 401(k) plans now offer annuity options, either directly or through annuity-enhanced target-date funds. These are funds where you choose a target year, usually the year you plan to retire, and at first invest in higher-risk assets, such as stocks. As you get closer to your target year, the fund automatically shifts your money to safer investments, such as bonds.
Annuities offer a steady stream of income for life and peace of mind in retirement planning. On the other hand, they offer less flexibility, often include complex terms, and sometimes have added fees.
There’s No Rush
For many retirees, keeping your 401(k) where it is can be a solid choice, but you don’t need to make a move the day you retire. Take your time. Look at what your current plan offers. Compare it with your IRA options. Consult a financial advisor who can help you come up with a strategy that fits your goals, income needs, and comfort level.
by Jean Miller | Accounting News, News, Newsletter, Retirement, Retirement Savings
At some point in your employment journey, you’re going to find yourself at a crossroads – whether you voluntarily quit a job for a new position or face an unexpected layoff. Amidst the emotional and logistical challenges of these changes, one crucial aspect that requires attention is your 401(k) plan with your former employer. Here’s how to manage your 401(k) plan when employment changes.
Assess Your Options
When you leave your current job, you need to evaluate your available options for your 401(k). Typically, these are your main options:
- Leave it be: In some cases, leaving your 401(k) with your former employer may be a viable option, especially if you’re content with the plan’s performance and fees. This option is often convenient and allows you to maintain the tax-advantaged status of your retirement savings. However, you won’t be able to make additional contributions, and you’ll need to manage the account independently.
- Roll it over into your new employer’s plan: If your new employer offers a 401(k) plan and allows rollovers, transferring your 401(k) to your new employer’s plan would allow you to consolidate your retirement savings, making it easier to manage. Be sure to research the fees and investment options of the new plan before making a decision.
- Roll it over into an Individual Retirement Account (IRA): Transferring your 401(k) funds to an IRA provides more control over your investments and may offer a broader range of investment options compared to employer-sponsored plans. IRAs are not tied to your employer, offering flexibility and portability. Be mindful of fees and investment choices when selecting an IRA provider.
- Cash Out: While it’s possible to cash out your 401(k) when you leave a job, it’s generally not advisable. Cashing out comes with tax consequences, including penalties for early withdrawal if you’re under 59 ½. Additionally, you’ll miss out on the potential long-term growth of your investments.
- Convert it to a Roth IRA: If you’re willing to pay taxes upfront, you can convert your traditional 401(k) into a Roth IRA. You will pay income taxes on the amount converted, but qualified withdrawals in retirement are tax-free. This option may be beneficial if you expect to be in a higher tax bracket in the future.
Understand Tax Implications
When contemplating what to do with your 401(k), it’s important to understand the tax implications that could be triggered. Cashing out, as mentioned, may trigger taxes and penalties. On the other hand, transferring your funds without a direct rollover may result in mandatory withholding. To avoid unexpected tax bills, consider consulting with a financial advisor who can offer guidance based on your personal situation.
Stay Informed About Deadlines
The different options available for your 401(k) are all subject to different deadlines. Missing these key deadlines could limit your choices. Some plans may require you to take action within a certain timeframe, so it’s imperative to stay informed about these deadlines to make the most informed decision possible.
Seek Financial Advice
Navigating the management of a 401(k) plan on top of a job transition can be stressful. A financial advisor will be able to offer valuable insights tailored to your specific circumstances. They can help you weigh the pros and cons of each option and guide you toward a move that aligns with your long-term financial goals.
by Daniel Kittell | Accounting News, News, Retirement, Retirement Savings, Uncategorized
While the purpose of a retirement account is to fund your lifestyle in your golden years, certain situations in life might necessitate dipping into those funds early. Typically, withdrawing from an IRA before age 59 ½ will trigger a 10% early withdrawal penalty. However, there are some key milestones where that penalty is waived. Here’s when you can avoid the IRA early withdrawal penalty.
Medical Expenses
IRA funds can be used to cover unreimbursed medical expenses that exceed 7.5% of your adjusted gross incomes. For example, if your AGI is $80,000 in 2023, you can use a withdrawal to cover unreimbursed medical expenses this year over $6,000. You don’t need to itemize your taxes to take advantage of this exception to the early withdrawal penalty.
Health Insurance
If you are unemployed and have received unemployment compensation via a federal or state program for at least 12 consecutive weeks, you may be able to take IRA distributions without penalty in order to cover health insurance premiums for you, your spouse, and any dependents. The withdrawal must be made in the same year that you received unemployment, or the next year. You must also take the withdrawal within 60 days of being re-employed.
Costs for Higher Education
Penalty-free IRA distributions may be used to pay for some higher education costs for you, your spouse, your children, and grandchildren. Eligible costs include tuition, fees, books, supplies, equipment required for a student’s enrollment, and expenses for certain special-needs services. For students who attend school at least half-time, room and board may also qualify. Keep in mind that IRA withdrawals are considered taxable income and could lower the student’s qualification for financial aid.
Home Purchase
If you are funding a first home purchase with funds from an IRA, the withdrawal may be penalty-free. This doesn’t mean that you need to be a first-time home buyer. The IRS broadly defines a first-time buyer as someone who hasn’t owned a home in the last two years. If you fall into this category, you can withdrawal up to $10,000 ($20,000 for couples) without penalty. If the purchase or building of the home falls through, you have 120 days from the date of distribution to put the money back in your IRA in order to avoid the penalty.
Birth or Adoption of a Child
Parents are eligible to take a penalty-free IRA distribution of up to $5,000 following the birth or adoption of their child. The withdrawal must be made within one year of a child’s birth or legal adoption date.
Disability
Disabled retirement savers under age 59 ½ who are “totally and permanently disabled” aren’t obligated to pay the IRA tax penalty. In order to qualify, per the IRS, one must be unable to do “any substantial gainful activity” for a continued or indefinite duration due to a physical or mental condition, and a physician must certify the severity of the condition.
Military Service
Members of the military reserves in the Army, Navy, Marine Corps, Air Force, Coast Guard, or Public Health Service may be exempt from the tax penalty if they were ordered or called to active duty after Sept. 11, 2001, and in duty for at least 180 days. The distribution must be taken during the active-duty period in order to avoid the 10% early withdrawal penalty.
An Inherited IRA
If you inherit a traditional IRA, you can take penalty-free withdrawals, even before age 59 ½. However, you will need to pay income tax on each distribution. If the original owner of the IRA account passed away after Jan. 1, 2020, you will be obligated to withdraw all assets from the inherited IRA within 10 years of the IRA owner’s death. The exception to this is if you are the surviving spouse or minor child of the original account owner, or if you are disabled, chronically ill, or up to 10 years younger than the original account owner.
For more information on individual tax planning, click here.
by Pete McAllister | Accounting News, News, Retirement Savings
A Roth IRA is a great vehicle for saving for retirement. Because you pay taxes on money going into your account, you can withdraw funds tax-free in retirement. And unlike other retirement funds, required minimum distributions don’t apply to Roth IRAs, so your money can grow tax-free for as long as you like. To be sure you’re getting the most from a Roth IRA account, this article will go over some common — and sometimes costly — mistakes people make with their Roth IRAs.
Don’t Skip a Roth IRA Just Because You Already Have a 401(k)
You might be tempted to skip a Roth IRA if you already have a 401(k), but this savings combination can help accrue a considerable nest egg. To take full advantage of both retirement plans, be sure you’re contributing enough to your 401(k) to get the full employer match, if your employer participates in a match program. Once you’ve maxed out your contribution to the employer match, open a Roth IRA and begin funding it.
Don’t Contribute If Your Income Doesn’t Allow You to Qualify
For 2022, married couples filing jointly can contribute to a Roth IRA if your modified adjusted gross income (MAGI) is $204,000 or less ($129,000 for single filers). Contributions begin phasing out above those amounts, and you’re not permitted to contribute to a Roth IRA once your income reaches $214,000 if married and filing jointly ($144,000 for single filers).
If you make contributions when your income places you above the contribution limit, it’s considered an excess contribution. The IRS will charge a 6% tax on the excess amount for each year it remains in your account.
Don’t Contribute Too Much
Just as with income limits, if you deposit more than you’re permitted to contribute to your Roth IRA, you’ll be subject to the same 6% excise tax on the extra funds every year until the overage is corrected. If this slip-up endures for a few years, it has the potential to be costly. To fix this problem, you have until your tax filing deadline to withdraw the excess funds without facing the penalty. Just be sure to also withdraw the interest and any other income generated from those surplus funds.
Don’t Discount a Backdoor Roth IRA
For those earners whose incomes fall above the Roth IRA limits, you have the option of a backdoor Roth IRA. Using this strategy, after-tax contributions are made to a traditional IRA, then the invested money is converted to a Roth IRA. However, because funds deposited into a traditional IRA are pre-tax, expect to pay income tax on the conversion. This move even has the potential to bump you into a higher tax bracket, so it’s never a bad idea to consult a tax professional when you’re considering a backdoor Roth IRA.
Don’t Miss Out on a Spousal IRA
A spousal IRA is an exception to the condition that an individual must have earned income to contribute to an IRA. It permits a working spouse to contribute to an IRA in the name of a spouse who has no income or very little income. Provided the working spouse’s income equals or surpasses the total IRA contributions made on behalf of both spouses, this is a strategic approach to investing.
Depending on your income, your maximum contribution to a spousal IRA is $6,000 each, which increases to $7,000 per person at age 50. So if you’re 51 and your spouse is 49, you’re able to contribute $13,000. Once your spouse reaches age 50 you can begin contributing the maximum $14,000.
Don’t Do Rollovers Without Knowing the Rules
When you do a rollover — withdraw money from one retirement account and deposit it into another — you need to abide by certain rules in order to avoid tax consequences. For instance, if you withdraw funds from a retirement account like a 401(k), you have 60 days to deposit the full amount into your Roth IRA. Neglecting to do so will render the withdrawal a taxable distribution, and may also be subject to a 10% additional early-distribution tax. Also be aware that typically only one rollover per year is permitted.
You can also choose to do a direct rollover where all or a portion of your retirement funds are directly transferred from one qualified retirement plan to another. This move is not taxable, so you can move your money without facing tax penalties, and your money continues to grow tax-deferred until you make withdrawals. However, keep in mind that your contributions to a 401(k) or traditional IRA were pre-tax, so when you roll them into a Roth IRA, they’ll count as income in the year you made the rollover.
Don’t Forget About Beneficiaries
If you neglect to name a living beneficiary for your Roth IRA, the money typically will need to go through probate before your heirs gain access to it. Going to probate means that all your assets, including your Roth IRA, are lumped together, and all debt is paid before the funds are distributed to heirs. This, of course, means that your heirs may not end up with as much as you’d planned. Be sure your named beneficiaries are up to date.
Don’t Just Sit on Your Funds
You have to make contributions to your Roth IRA if you want to take advantage of the tax-free growth and compound interest. You also need to decide how you want to invest those funds. If investment strategy isn’t your strong suit, consider working with a financial professional.
by Jean Miller | Accounting News, Financial goals, News, Retirement, Retirement Savings, Uncategorized
Individual Retirement Accounts (IRAs) allow for a tax-advantaged way to invest your money long-term. Whether you choose to invest in a traditional IRA or a Roth IRA (or a combination of the two), you’ll defer paying income tax on the money you set aside for retirement. Follow these IRA investment strategies to boost your retirement savings and maximize the value of you IRA.
Max it Out
The maximum amount you can contribute to an IRA for 2022 is $6,000, and it is generally worth making the maximum contribution. Note that there are income limits. You can make a full contribution if your income is less than $144,000 ($214,000 if you are married filing jointly). For 2022, retirement savers age 49 and younger can max out an IRA by saving $500 per month or making a deposit any time before the 2022 IRA contribution deadline of April 15, 2023.
Make Catch-Up Contributions
As of the calendar year you turn age 50, you are eligible to contribute an extra $1,000 to your IRAs for that year, and all following years. If you weren’t able to save as much as you would’ve liked earlier in your career, catch-up contributions offer an opportunity to boost your yearly savings until retirement.
Don’t Wait Until the Contribution Deadline
It’s true that you can make a contribution to an IRA up until the mid-April tax filing deadline and apply it to the previous tax year. By shifting some funds into an IRA, you may be able to reduce your tax bill or boost your refund. However, that may not be the most beneficial move depending on your circumstances. When you wait to contribute, you miss out on potential growth. There is also the chance that you will be making an investment at a high point in the market. Contributing to an IRA at the beginning of the tax year enables the funds to compound for a longer stretch of time. You can also consider making small monthly contributions as a budget-friendly approach that will still yield favorable results.
Low- and Moderate-Income Workers Can Claim the Savers Credit
If your adjusted gross income (AGI) is below $34,000 as an individual or $68,000 as a couple in 2022, you may be eligible to claim the saver’s tax credit as well as the tax deduction for your IRA contribution. This credit is worth between 10% and 50% of the amount you contribute to an IRA up to $2,000 for individuals and $4,000 for couples.
Use Your Tax Refund to Contribute to Your IRA
You can use IRS Form 8888 to deposit all or part of your tax refund directly into an IRA. Provided the deposit is made by the due date of your tax return, you can file a tax return claiming a traditional IRA contribution before the money has actually been deposited in the account. In other words, if you file earlier rather than later, it’s possible to use your tax refund to make an IRA contribution you already claimed on your tax return.
Consider Converting to a Roth IRA
For some taxpayers, it may be beneficial to convert an existing traditional IRA to a Roth IRA. Expect to pay income taxes on the conversion amount, which could be substantial, so be sure to do the math before you make the leap. The funds that are moved into the Roth grow tax-free and will be tax-free upon withdrawal in the future, provided the account is at least five years old. The decision to convert to a Roth IRA basically boils down to whether you want to take the tax hit now or later. The farther away you are from retirement, the more advantageous a Roth IRA could be, because the Roth’s earnings will have more years to compound.
