In today’s economy, many people are trying desperately to make ends meet. Many have to borrow against their 401k retirement plans because of job losses or other reasons just to pay the mortgage and recurring bills. There are advantages and drawback to cashing out a 401k. Depending on your needs, there are three ways to use your 401k savings plan. You can take out an Regular 401k loan, a Hardship withdrawal, or a Non-Financial Hardship withdrawal.
The good news about a Regular 401k loan is that taxes and the 10% penalty fees do not apply, unless there is a default. This type of loan must be paid back within 5 years. If you have purchased a home, you will have a longer period for repayment. If you have a spouse, you must have their consent before the loan will be approved.
One possible inconvenience of a Regular 401k loan is the repayment process. If you quit your job or if your job is terminated, you must repay the loan in full within a sixty day period. If you do not meet the repayment deadline, the 10% penalty fees and taxes will apply by default.
If you have urgent financial needs, you may qualify for a Hardship withdrawal from your 401k. The IRS has strict guidelines on how these funds are to be used. You must present supporting facts and verification to your 401k administrator, indicating that a critical or urgent need exits for the withdrawal. A Hardship withdrawal is subject to taxes and penalty fees.
A Non-Financial Hardship 401k withdrawal is subject to taxes but no penalty fees are charged. You may qualify if you become permanently disabled; your medical bills top 7.5 percent of your gross income; a court order to forfeit the funds to your spouse or child; your job has been terminated, you quit or you retire early and have reached age 55 at some point in that year.
A withdrawal from a 401k should be a last resort. The 401k is intended for your retirement income, so you should start contributing again as soon as possible.
When it comes time to switch jobs, your retirement savings need to go with you. However, they can follow one of several different paths. You have the choice of cashing out your 401k, or simply transferring it elsewhere, to say an IRA fund. There are some significant drawbacks to going the former route. One of the more notable is that the withdraw amount will be taxed. Depending on the tax rate, that could mean a good chunk of your savings down the toilet. By default, your employer will have to take nearly a quarter of the savings to help pay off federal income taxes. You will also have to pay income tax on the savings. Additionally, depending on the time of withdraw, you might face some penalties.
Fortunately, a 401k rollover to IRA isn’t taxed. This is probably the smartest route you can take (especially if you don’t intend on moving to another job). In those circumstances, you can have your 40lk savings transferred to the respective company’s retirement plan.
In tough situations, however, some people are forced to take from their savings as a last resort. This is known as a 401k hardship withdraw, and is governed by some strict guidelines established by the IRS to ensure that you have completely exhausted every last option. One acceptable reason (as defined by the IRS) for tapping into your savings is for unpaid medical expenses. Even education-related expenses are considered appropriate grounds for cashing out. Even though you may find yourself in trying times, you will still be subject to taxes and any applicable penalties.
It makes absolute sense to rollover you 401k to other retirement accounts until it comes time for you to actually retire. The costs involved in cashing out early make it anything but worthwhile. Try to plan ahead for financially straining circumstances so you don’t find yourself needlessly draining your nest egg.
After years of saving for your retirement through your company’s 401k plan, a change in employment can easily leave you confused regarding your retirement funds. There are a number of different options that you can take to transfer your existing 401k account. Exploring the different options is essential to determining the strategy that is right for you.
The first option you have with your 401k is to simply continue with your existing plan. Some plans will allow you to continue the management of your 401k with the current plan administrator. This option may only be available depending upon the conditions of your departure from the company.
Another option is to transfer the existing 401k account into another 401k account. If you are changing jobs, you will have the option to transfer your existing plan into your new plan. This type of arrangement may be suitable if the new retirement plan has favorable options that meet your needs.
A third option is to rollover your 401k into a traditional IRA account. This option has picked up in popularity the past couple of years. The more familiar people have become with this option, the easier the process to transfer the account over has become. New legislation has also been introduced that makes the process much easier for the plan participant.
A 401k rollover to traditional individual retirement arrangement offers the individual a number of favorable advantages. This type of transfer not only has significant tax advantages, but it also allows you greater flexibility and control over your hard-earned money.
The most recent option you have with your existing 401k plan is to rollover into a Roth IRA. Previously there was no direct 401k to Roth IRA options, but in very recent years, new legislation has been released to allow this type of transfer.
Similar to a traditional IRA rollover, the Roth IRA rollover provides many unique advantages. The most significant of which is the tax advantages of a Roth IRA account. A Roth is designed to allow tax-free distributions out of the account and does not have the same required minimum distribution restrictions as other retirement accounts.
Transfers into a Roth IRA are taxable to an extent upon the transfer date and are based upon a specific formula. Because the funds in your 401k have been added with pre-tax dollars, a portion of your transfer will been taxable. The IRS is not going to allow your funds to get off completely tax free, though the tax benefits are still prevalent.
Transferring your 401k participation plan into another investment vehicle can be a stressful process. Knowing your options can provide you peace of mind and greatly increase the overall stability and safety of your retirement funds.
So the question came up, “IRA versus CD? Which is better?” Many people are wondering what on earth to do with their money these days because the financial world has gotten so volatile and out of control. People are rapidly finding out that their investments have gone belly up, or the money they put in the hands of a mortgage broker was actually part of a ponzi scheme (think Madoff). Those who were lucky to dodge those bullets have watched the stock market go from the mid 6000s on the Dow up to over 10,000 in just a couple of months. How can this be?
What Is Causing the Market to Move So Much
The answer is that the market right now is being manipulated by vast amounts of available cash in the hands of institutions, hedge funds, and private investors. It is completely illogical that the components of the Dow Jones Industrial Complex could be worth 6000 one month and 10,400 a couple months later. What fundamentally changed in those 6 +/- months? The answer of course, is nothing fundamentally changed.
What is happening is that there was a huge liquidity crisis where banks, hedge funds, and institutional investors had to unwind large and complicated positions in order to meet demands for cash redemptions and the resulting margin calls on vulnerable positions. The market continues to be impacted by imbalances of supply and demand for individual stocks and cash. The result is weak institutional players are being squeezed out and bankrupted one at a time – each one causing another round of volatility as positions are folded up and liquidated.
How Does the Market Volatility Effect My IRA versus CD Decision?
The answer to the IRA versus CD question is simple: you need both in the same package. Adding an qualified Certificate of Deposit to your retirement portfolio is a terrific way to mitigate volatility (risk) in your retirement nest egg. IRA versus CD doesn’t have to be either or – in fact it should be both. Having both in your retirement account dramatically alters the expected return of your account in ways that substantially reduce risk in ways that an equities only portfolio can not.
My favorite retirement and investment vehicle by far is the Roth IRA (or Roth 401k). Many advisors have been telling folks to ignore this valuable tool because you don’t get a tax deduction on your contributions.
Think about it, if your tax planner or CPA is expected to get you the best deal on your (or should I say off of your) taxes now, why would they recommend that you contribute to a plan that offers no immediate deduction of income? Many don’t. Many more won’t.
If this is the advice you have been receiving, you are going to have to make up your mind now. Which is more important to you? Do you want a tax deduction now, or tax-free income for the rest of your life? That really is the question.
If you go the Roth route, you won’t get a deduction, but all the growth inside of your account will be Tax-Free when you start pulling money out! If you play your cards right, you can end up with a HUGE account that can serve you well in your golden years. You can even pass this onto your heirs.
You can set up a Roth with your broker or maybe even your bank. Look for the ones that charge the lowest fees. Many won’t charge you any fees, and those can be great. Keep in mind that you can have more than one Roth set up. You don’t have to put all of your eggs in one basket.
If you are going to trade stocks inside of your Roth, why not take the Scottrade or Etrade account (or any broker you prefer) with no fees.
However, if you want to do real estate or other not so main stream type of investing inside of your Roth, you are going to need to hire a third party administrator. Again, keep your stocks, ETFs, and anything you can buy from a broker in that fee-free account. The third party or “Custodian” is going to charge you some fees. But, it may well be worth it.
Also, if you are going to be actively trading futures or commodities inside of your account you may have to go with a custodian.
Can you imagine making a real estate transaction that you earn $50,000 on, and not having to pay one thin dime in taxes? That sort of thing is being done all the time inside of Roth accounts, even though many CPAs have advised against it.
If the investment is inside of your Roth you don’t have to worry about holding it for a year or longer to get to a long-term capital gains situation. It doesn’t matter if you hold the investment one year or one minute, you won’t pay a dime in taxes with a Roth! Meditate on that and see if it doesn’t get your strategies rolling!
Why not take full advantage of the Roth, and take the tax man completely out of your pocket by setting up your account today!
I am constantly amazed at how main stream financial “Experts” miss the value of a Roth IRA or 401k.
Here is an example. A quote from CNNmoney.com about a Roth IRA compared to a traditional IRA:
“Mathematically, there’s no difference between getting a tax break at the beginning or end. All else being equal, you end up in the same place whether you pay taxes at the outset or in retirement.”
Mathematically there is no difference???? This is the kind of garbage advice that has cost taxpayers untold Billions of dollars they could have otherwise put in their pockets.
We’ll take a look at a hypothetical example, and compare the Roth to a traditional IRA.
In our example let’s say that Bob puts $40,000 in a Roth 401k, and then deposits $40,000 in a traditional 401k account the following year.
Over the years Bob earns $260,000 on each account. At retirement (age 59 1/2) each account now has $300,000 in it.
With the traditional IRA, Bob got to deduct $40,000 from his taxes the year he first opened it up. Let’s say Bob was in the 30% tax bracket, so he saved about $12,000 on taxes that year (disregarding any other tax strategies he may have been using at the time – which surely he would be if he was in that tax bracket).
With the Roth, Bob got no deduction the year he opened the account (although there is a small tax savings you may qualify for with your Roth – we’ll just ignore it in this example).
Now, say that Bob needs to raise $200,000 quickly for some reason at retirement age. He decides to pull $100,000 from each account. Assume that Bob’s business is still running (although with a lot less Bob these days) so that he is still in the 25% tax bracket.
On the 100 grand he pulls out of the Roth, there are no taxes to pay, not one dime! On the other hand, Bob will need to pay uncle Sam $25,000 in taxes on the traditional $100,000.
What if over the years taxes are raised (even though we know Washington would never do that to us) and Bob is now in the 50% tax bracket? Bob would gladly write a check to the IRS for $50,000 and be so happy that he got the $12,000 tax break years ago right?
Give me a break! No mathematical difference? You do the math and ignore what some of these so called “experts” are saying about the Roth.
Forget day trading stocks and learn how to trade the mini index!
When you’re trying to make the very difficult decision to withdraw from your retirement savings the first thing you’re going to want to know is how much will the tax be when cashing out a 401k.
The tax percentage you will be charged is decided on an individual basis, but there are ways for you to figure this out.
You will be charged both state and federal taxes.
The federal percentage varies based on your income bracket. Keep in mind that the money you have put into a traditional retirement plan was before taxes were taken out, which means that money lowered your bracket. If you invested in your retirement plan last year and not this year, then that may raise your income and put you in a higher percentage bracket. Also, the money you are cashing out will count as income for this year, and may raise your bracket, as well. Despite all these variables, you can look at your tax paperwork from last year, which will say what percentage you fell into and estimate from there.
The state percentage applies to your whole state, and you can easily look up your particular states current percentage online, or, find it on your last years paperwork, assuming it hasn’t gone up this year.
If you have decided to withdraw it’s important to note a few things. First of all, on top of the taxes, you will also have to pay a ten percent early withdrawal penalty. You cannot withdraw funds at any time you want, there are only certain times you will be able to do this over your life. Also, twenty percent of the amount you withdraw will be held for taxes and the early withdrawal penalty, and it will be your responsibility to take care of the rest.
Obviously these early withdrawal costs really add up and make cashing out an undesirable thing to do.
IRA and Roth IRAs are two examples of government-regulated retirement savings plans – called qualified plans. Both are generally personal plans you set up at banking-type institutions that you can contribute to and withdraw from yourself. Other examples of qualified plans associated with work are 401(k), 403(b) and their Roth versions- like Roth 401(k).
This article explains which qualified plans have minimum required distributions (MRDs) associated with them and some strategy.
Qualified plans such as 401(k)s, and IRAs were created with specific tax characteristics as an incentive for people to save for their retirement by contributions from their working income.
There are fundamentally two different qualified plan type tax characteristics. I’ll call them
* Deductible Contributions then later taxed, and
* Nondeductible Contributions then never taxed
Taxation and Obligations for the owners (i.e. plan contributors) of the plans
The tax characteristics of the ‘deductible contributions’ type plans are represented by your 401(k) at work or your own IRA. Your yearly contributions to each plan are limited but deductible from your income in the year of contribution. But the income tax of both those contributions and all earnings they create are tax-deferred until you withdraw money from your plan.
Whenever you withdraw from these plans, the withdrawal amount in that year is added to your income to be taxed at your income tax rates. Since qualified plans are geared for retirement, you’re penalized with a tax of 10% on your distribution in addition to whatever income tax is incurred if you’re under 59 1/2.
Lastly, government-regulations obligate you to make at least a minimum required distribution (MRD) each year from your IRAs after you’ve turn 70 1/2.
The tax characteristics of the ‘non-deductible contributions’ type plans are represented by your Roth 401(k) at work, or your own Roth IRA. Your yearly contributions to these plans are limited, but they’re not deductible from your income for taxation. So they’re taxed. But the advantage now is that they and all their earnings and gains will grow each year tax-free – not just tax-deferred.
Additionally, when you withdraw from these Roth-type plans, the money comes out tax-free. But you must wait to withdraw your money until reach 59 1/2 or be penalized as above.
If you’re the owner of a personal Roth IRA, you have no obligation to make any MRDs ever. If you leave your Roth IRA to your spouse, she also has not obligation to make MRDs either.
If you have a Roth 401(k)s, you must make the normal RMDs as those with non-deductible contribution types above, but – like all Roth plans – the money comes out tax free.
What about plan beneficiaries after you die?
All beneficiaries of plans -401(k)s, IRAs, Roth 401(k)s or Roth IRAs – must make MRDs except the spouse beneficiary of a Roth IRA if she chooses to be owner. But remember, RMDs or withdrawals from Roth plans always come out tax free.
How much money must come out in an RMD?
The MRD for a specific year is the value of your IRA (or total of all your IRAs if you have more than one) as of Dec. 31 of the previous year, divided by your life expectancy factor (from IRA table found in Appendix C of IRS publication 590 (online)) for that specific year. So, each year your MRD will change since the value of your IRA will change and your life expectancy will change. A new calculation must be done each year.
You can withdraw more than your MRD, but you’re penalized if you withdraw less. You’re penalty is a tax equal to 50% of that part of your MRD you didn’t withdraw.
Reasons for converting to a Roth IRA Tax free growth and tax free withdrawals forever is hard to pass up. And that’s for owners, spouse beneficiaries and nonspouse beneficiaries.
Only the nonspouse beneficiaries need to make RMDs – but they’re still tax free ones. And those RMDs are based on the beneficiary life expectancy. So if their young, very little has to be taken out.
It makes good sense to convert any Roth 401(k) to your own Roth IRA for the freedom of not having to make RMDs by the owner or his spousal beneficiary. The conversion is tax free.
Conversion from a ‘deductible contributions’ plan to your Roth IRA requires you to pay income tax on amount you choose to convert. For 2010 and beyond there’s not income limit prohibiting you from making the conversion – as there has been.
Holding money in a Roth IRA keeps it safe from future increases in income tax rates that plague holders of ‘deductible contributions’ plans.
One thing that most people usually start thinking about when nearing their retirement age is what their lives will look like after retiring. Expenditures on food, housing and other common expenses are just a few of the things to consider once you no longer have a full-time job to depend on. The fact of the matter is that the hope and assurance you have for your retirement years depends largely on the amount of preparation you put into place right now.
Considering the dizzying number of IRA investment options that are available to you, the ability to make an informed choice can be a daunting task. But since most company retirement pensions are gradually dying out, it is a critical task. This is why the need for retirement preparation and arrangement is very necessary – even if you are still in your thirties or forties.
The best way to approach this is by using IRA investment options that elicit specific tax features and benefits. This will allow you to save a lot more money over time. The IRS tax code in the United States gives you the option of investing a specific amount of money every year for the purpose of funding your retirement years. In 2008, for instance, you are allowed to contribute $5,000 into a traditional IRA – $6,000 if you are over the age of 50. It should be noted that this amount may be limited by how much you earned in a year and whether you participated in a company retirement plan. The best place to find the current IRA rules is at the IRS website.
If you are new to retirement investing, it is important to understand the benefits of using an IRA. The prime advantage of your savings in IRA’s is that you not only will get a tax deduction for your IRA investment, but your money will earn for you tax-deferred. You won’t have to pay taxes on these earnings until you actually withdraw them in retirement. At that time, you will generally be in a lower tax bracket and pay a much lower rate on your earnings. This will allow your IRA investments higher rates of return and more growth. Your invests will compound, especially if you have many years left before retirement.
The time to start planning for your retirement is right now, no matter what your current age. The longer your investments have time to compound, the more comfortable your retirement will be.
If you are interested in saving money for your retirement, then you will be interested in an IRA. An IRA, or Individual Retirement Account, is an account that people place funds into for their retirement. If you start an IRA, you will not have to pay any taxes on the contributions that you make to your account. The taxes will be deducted much later, at retirement, when you are withdrawing the funds. If you do withdraw money earlier than your retirement, you will have to pay a ten percent penalty on the funds you withdrawal.
To start your own retirement account, all you have to do is go to a bank, brokerage firm, or a mutual fund company, and then you will be able to start saving. The process is very simple. Once your account is established, you will be able to contribute the amount of money you prefer and start investing the funds available for trading.
An IRA can be a great way to lower your taxes too. You can save money for your future while also keeping larger portions of your income. You can deduct up to 5,000 dollars on your taxes by making additions to an IRA.
By using an IRA, you will be one of the few who is preparing for your own future. An IRA can be a great way to start your retirements savings. Many people go about their daily lives not thinking about far into the future. Sometimes it can be hard to think about saving money when you are paying high monthly bills. If you have an IRA, you will be able to put yourself on a schedule of contributions to ensure that you put an exact amount of money into the account every month. When you contribute to your account this way, you will know where your money is going and how much you are able to save over time.
Many people use IRA’s for the tax benefit that is obtained from this method of saving. When you contribute to an IRA, the income you place into your account is completely tax free. Using this system will allow you to establish a fairly large. The account will also be compounding every year. The compounded rates will apply to the money that was not taxed too. This can equal a fairly large amount of savings after many years of contributing.
You also get a wide variety of options for your retirement account with an IRA. You will be able to invest into mutual funds, stocks, and even ETF’s with your funds. You can also choose safe investments like CD’s or other safe market accounts.
After many years of contributing to an IRA, you will have a substantial amount of money. These accounts are designed for long term saving. When you use an IRA, you will be able to compound large amounts of money every year. This compounding over time will greatly add to the amount of money you have saved for your retirement.
If you want to take advantage of the tax free nature of the Roth IRA you will have to do a IRA conversion to Roth. 2010 allows everyone, regardless of income to take part in IRA conversion. Income restrictions limited this in the past.
Through the use of an Individual Retirement Account, you will contribute large amounts of money towards your retirement savings with continuous contributions and compounding adding to the overall sum. These factors will benefit you greatly when you decide to retire later on.