Managing 401(k) is vital when you are switching jobs or retiring from work. A 401(k) is a savings account for retirement that is sponsored by the employer that offers a tax benefit which you can save. When the money is put into the account, the taxable income is lessened. On the other hand, when the money is withdrawn, there may be a number of stipulations that may cost some amounts.
One can leave this account alone, withdraw, re-investment or manage 401(k) rollovers with this account. The 401(k) rollover is the option with most benefit in majority of the situations. There are a few conditions that must be kept in mind. For instance, a 10% withdrawal penalty is imposed if you withdraw amount from the account before the age of 59 and a half years. Also, if you are planning to withdraw a lump sum from this account, it may be considered as an income and taxed.
There are several 401(k) account options available:
- You can leave the account untouched. If you are changing jobs, then this account stays with the previous employer. But the disadvantage is that, you would no longer be able to contribute to it. And if an additional account is created in the new work location, managing multiple accounts can become tricky.
- As mentioned above, there is a 10% penalty if the amount is withdrawn before you are 59 and a half years old. However, if you are above, the amount can be withdrawn without the penalty but it will be taxed. In both the cases, you will have lesser amount in your hand than your investment.
The most appropriate solution is to roll over the 401(k) account to a new workplace when you are switching jobs. This can ensure that you invest tax – free and at one location and making it easy to manage the money for retirement.
Else, the 401(k) account can be rolled over to an Individual Retirement Account that offers almost the same benefits of the 401(k) account but has no connection with the employer. Therefore, there are no extra procedures applicable when switching jobs. Also the range of investment opportunities is wider than the average 401(k) account. The last option for rolling over is to convert the 401(k) account to a tax-free annuity account. An annuity provides set incomes on a monthly basis. In order to roll – over your 401(k) account, you can contact with your plan administrator, choose the roll-over strategy you want to adopt and discuss the details thoroughly before implementing it.
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