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Can I Roll Over My 401(k) Without A Penalty?

Thu, 03 Nov 2011 12:00:17 +0000

By Quentin Fottrell

Question: I attended a community college for around two years and during that time I had a job with a 401(k) that accumulated a modest $2,000. Last August, I had to quit my job in order to attend the University of Illinois at Urbana-Champaign. Now, I am faced with the decision of what to do with my 401(k). the plans administrator recently sent me a letter letting me know that I had to act on the plan and either withdraw the money or they would roll it over to an IRA.

Is there typically a fee or penalty, whether from the IRS or the plan’s administrators, for the rollover and, if so, typically how much? And more importantly, will my plan to rollover my 401(k) to an IRA, for the purpose of making an education expense withdrawal, and avoid the typical 10% penalty, work? Or may I not make a withdrawal from an IRA that early?

– Jessica Radek, Northlake Il.

Answer: your plan is a sound one. You will avoid the 10% early withdrawal penalty by taking a “direct rollover” — from one trustee to another — from your 401(k) plan to an IRA. (To do this, you open the IRA first, then fund it with the 401(k), not the other way around). as for a rollover fee, most brokerage firms don’t have them, says Robert Schmansky, founder of Clear Financial Advisors in Bloomfield Hills, Mich. for instance, online brokerages E*Trade and Scottrade.com have no minimum fee for an IRA rollover, nor do TDAmeritrade, Vanguard or Charles Schwab.

Once the IRA is funded from the rollover, you can make a penalty-free early withdrawal from the IRA for qualified higher-education expenses. Most brokerages don’t charge withdrawal fees, either. Eligible expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus an amount for room and board determined by your school if you attend at least part-time, says Peter Maris, founder and principal of Resource Financial Group in Wilmette, Il.

There are some potential pitfalls to be aware of. there may be a waiting period to access the newly set-up IRA, says Schmansky – typically just a few weeks. And just because you are avoiding the 10% early withdrawal penalty doesn’t mean you avoid federal income taxes. if you rolled over from a traditional 401(k) to a traditional IRA, the total amount withdrawn is taxable as income. if you have qualified education expenses, any taxes would need to be paid from a different source.

Be sure that the early withdrawal and the associated taxes are worth it. Remember, this is tax-advantaged money in a retirement account. Some financial advisers recommend that you explore options for paying for college before turning to retirement assets, no matter how large or small. However, Dan Mahoney, a spokesman for Charles Schwab, says, “Depending on the client’s situation, it may be better to use their rollover IRA assets for education and pay the taxes rather than take out a student loan and potentially carry on more debt.”

For more details on IRA withdrawals, see the IRS Website or our guides below.

For more:

When the Fleigs moved from California to Ohio in 2004 for Chris’s job as a paper salesman, the lower cost of living allowed Tina, formerly a finance director, to become a stay-at-home mom. (They have two kids, Bailey and Jake, now 3 and 6.)

Saving for college and retirement on 1 income

How to Know When to Quit

Thu, 13 Oct 2011 20:00:05 +0000

This post is from staff writer April Dykman. before I became a full-time freelancer, I worked for a couple of different companies. Both times I started a new job, it started out exciting and fun. great benefits! cool perks! interesting work! after a year or two, it got harder to get up in the morning [...] …

How to Know When to Quit

4 Options for Your 401(k) When Leaving Your Job

Thu, 15 Sep 2011 18:00:09 +0000

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Many traditional money management concepts or principles, such as saving three to six months of expenses for emergencies, have been passed down to become “rules” of a sort. but given all that’s changed with the economy, old school advice may no longer be relevant. Here are some rules to reconsider, and ones that still stand the test of time.

Old School Thinking that may No Longer ApplySave 3 to 6 months’ worth of expenses in your emergency fund

Squirreling away enough to cover three to six months of expenses in case of unemployment, a medical emergency, or other financial disaster is an important goal—but it may not be enough. You’ve probably heard (or worse, witnessed) the horror stories of massive unemployment making it much harder to find a new job. the process can take well over six months; in fact, recent data shows the average length of unemployment has surged to an all-time high of 40.4 weeks.

Whether this is an unusual financial circumstance or the “new normal,” the uncertain economy and crappy job market means, for most people, “three to six months of expenses” is a good place to start, but not a smart place to stop (as one commenter noted on a blog post about the need for bigger emergency funds at the Squirrelers personal finance blog).

So how much should you save? Eight to twelve months might be the new three to six, but if that seems like an enormous goal, don’t get disheartened. as before, just start saving as much as you can…but don’t stop at the six month mark.

Refrain from using credit cards

A cash-only policy may help you get out of debt or keep tabs on your spending more easily, but not using your credit can also have a negative effect on how lenders view your creditworthiness.

SmartMoney reports that lenders are closing or slashing lines of credit for borrowers with high FICO scores (median 770) due to inactivity. that lowered credit limit available means their credit scores would drop. And credit scores aren’t what they used to be, either: Time says that a score of 750, which used to be considered “elite” may now be at the bottom of “very good,” due to tighter lending practices these days.

The moral is to go ahead and swipe that plastic regularly, and pay off the bills in full, of course.

SmartMoney has a few other old school financial rules you may want to break, challenging conventional wisdom like converting your traditional IRA to Roth (if you’re up to 10 years away from retiring, it can take years to make up for the taxes on the conversion).

Retire at age 65

Speaking of retiring, it may be time to put aside notions of 65 being the ideal retirement age. (So long, decent retirement age, we hardly knew you.)

The Simple Dollar points out that when the national retirement age of 65 was established for the Social Security Act in 1935 (over 75 years ago!), the average American lifespan was 61.7 years. Today, we still think of retirement age as 65, but the average lifespan is now 78 years—16 years more.

What this means for retirement planning is that we’ll probably have to change our approach and our perspective, looking at the period beyond age 65 as one of productivity (perhaps for a second career). While retirement investment tools are still helpful, we may need to tweak the inputs to account for longer lifespans, a second line of work, or just increased savings needs.

Just as “8 to 12 months” may be the new “3 to 6 months” for emergency fund savings and 750 may be the new 680 for credit scores, 65 may be the new 45 when it comes to our age and productivity.

Golden Rules of Money Management that Will always be Relevant

Two very basic money principles won’t ever change:

Spend less than you earn and invest the difference

It’s a boring and old piece of advice, but it’s also one you can count on: to increase your wealth, spend less than you earn, and invest the difference. this may be easier said than done, but the principle of living within your means is really the fundamental rule of personal finance.

Invest in assets, not liabilities

Of course, this also begs the question of what to do with the surplus or where to invest it. the other basic rule that will also stand the test of time is to direct your money to those items that will increase in value or produce income (assets), rather than those that will depreciate in value or end up requiring even more investment or upkeep (liabilites). this is the secret to building wealth most people ignore, the Frugal Dad blog says: “Buy Assets, Avoid Liabilities.” as an example, you could spend $200 on a new smartphone and then have to shell out more each month for the data and calling plans…or you could buy $200 in Verizon stock.

We’re all for buying smartphones and value them as a productivity tool, but it makes sense to apply this reasoning to every major purchase: will it improve your quality of life or increase in value, or will this item make you spend additional money each month just to have it?

Staying Flexible Is Key

The main lesson here may be to regularly take stock of what our financial priorities are and our progress, and to update our plans and budget according to changing circumstances and our goals. Previously mentioned financial priorities worksheets can help you plan for your big picture goals—which you should reevaluate whenever your life (and the world around you) changes in any big way.

Being able to adapt and adjust to changing financial challenges may be the best money management skill to have. what are your money management “rules” for this new economy? Photo by Lexie Rydberg.

You can follow or contact Melanie Pinola, the author of this post, on Twitter.

Send an email to Melanie Pinola, the author of this post, at melanie@lifehacker.com.

soulravah asked: ………..

I have money invested in my 401K.

if I get fired from work, what kind of taxes will I owe if I need to access my 401K for funds, while looking for a new job?

Thanks!
Question posted courtesy of: Gertrude

How can I access my 401K for funds, if fired from work?

Jennifer Waters’s Consumer Confidential: Could you pass a Facebook background check?

Tue, 26 Jul 2011 10:00:05 +0000

The next time you apply for a job, don?t be surprised if you have to agree to a social-media background check. many U.S. companies and recruiters are now looking at your Facebook, Twitter, Flickr and other accounts and blogs ? even YouTube ? to paint a clearer picture of who you are.

Jennifer Waters’s Consumer Confidential: Could you pass a Facebook background check?

happy driving with van lease

Thu, 21 Apr 2011 12:00:13 +0000

Van Lease

There are enormous differences between van renting and van leasing, van renting is for a short period of time. Van leasing means you take a van on at least a one year van lease. The first thing you will need to think about when leasing a van is the price. you will want a good deal and should negeciate as much as possible. you should make sure you know all the ins and outs of van leasing. before making any deal you will want to read the agreement to make sure you understand it. The dealer is an agent working as a go-between between you and the van leasing company.Dealers look around for the best deal for you and speak on your behalf to the leasing company and is paid commission. Any concerns regarding your van after that should go direct to the leasing company as his job ends at setting up the agreement.

happy driving with van lease

The Proper Way to Complete An IRA Rollover

Tue, 05 Apr 2011 10:00:19 +0000

The Proper way to Complete An IRA Rollover

Retiring or leaving the company–How to Properly do an IRA Rollover

Whether you are retiring or changing jobs, you need to know what to do with your employer sponsored retirement plan before your leave. Once you leave a job for whatever reason, you can choose to:
•Rollover the money into an IRA (ira rollover)
•Take the lump sum and pay the income tax and potential penalties
•Leave the money at the company if the company offers that as an option
•Rollover the money into your new employer’s plan, if that plan accepts rollovers

Realize that the above are options offered by IRS. however, your employer’s rules may be more restrictive and if so, there’s nothing you can do. for example, if you have a pension plan that offers payout options over your lifetime or jointly over the lifetime’s of you and your spouse, but there is no option to rollover a lump sum to an IRA (ira rollover), than the rollover option isn’t available to you. in other words, the “summary plan document” rules. You may want to get a copy of that now and have your financial advisor review it so that you know what options you have.

So the starting point is to get the information from your employer plan as to the options available to you.
What is an IRA Rollover?

IRA rollover means to move money from a retirement plan such as a 401(k), 403b (tax sheltered annuity) or 457 (municipal deferred compensation) into an IRA or other plan. If you receive a payout from your employer-sponsored retirement plan, a rollover IRA could be to your advantage. You will continue to receive the tax-deferred status of your retirement savings and will avoid penalties and taxes.

There are two reasons that rollovers are favored over other options:
•You have virtually unlimited investment selections. Unlike your employer’s plan which may have six investment options or even 50 investment options, in a self-directed IRA, you can choose any stock, any mutual fund and a host of other options listed later.
•Company plans often can restrict choices for non-spouse beneficiaries. Specifically, they may not be able to stretch IRA distributions over their lifetime. the benefit of this “stretch” is it defers taxes and allows the funds to potentially grow longer and larger in a tax-deferred environment.
The reason to leave your retirement plan with your company (if they permit this) is because your company plan is covered by ERISA and is protected from creditors. however, under the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the creditor protection will follow the money if it is rolled into an IRA and not commingled with other IRA money (from annual contributions).

Combining with other Retirement Accounts
The rollover IRA is usually funded by the eligible distributions from a company sponsored retirement plan. These distributions can be combined with your existing IRA(s) or placed into a separate IRA, but see the new creditor protection rule mentioned above. in fact, the IRS permits these funds to be combined with other types of retirement accounts. for example, say you have been self- employed and you have a one-person profit sharing plan (often referred to as Keogh plans), you could rollover the employer-plan assets into your profit sharing plan. Or, if you have a second job and that employer has a 403(b) plan and also accepts IRA rollover contributions, you could rollover your 401(k) balance into that 403(b) plan.

Completing your IRA Rollover
When it’s time to retire, you have a few options on moving the money from your employer’s plan.

Direct IRA Rollover:Your employer can directly rollover your retirement plan payout into a Rollover IRA and you will avoid the 20% IRS withholding tax. This is exactly what you should do by providing your employer the name, address and account number for your new Rollover IRA custodian. for example, you give your employer instructions to send your retirement account to ABC securities, account #8889999. Funds are sent directly to the IRA account and you never touch them. This is the preferred method of moving retirement funds.

Payout by Check: If your employer hands you a check for your retirement funds, the employer must withhold 20% for potential taxes. You can avoid the 20% IRS withholding tax on a payout by check from your employer if you deposit the check plus 20% into a rollover IRA within 60 days. in order to complete the tax free rollover, you now have 80% of your IRA rollover in your hand and you must take the other 20% out of your pocket so that you have a completely tax free rollover (you will get the 20% income tax withheld as a refund after you file your tax return). Don’t allow your employer to give you a check, as this requires you to take money out of your pocket to complete your rollover.

Taking a lump sum distribution: This is typically not a wise option because you will pay income tax on the distribution and a 10% penalty if under age 59 1/2. however, there may be reasons to take a taxable distribution. If you are set on buying a 0,000 boat and spending the rest of your life floating about the globe, then you may need to take your retirement funds now and pay tax. however, if you can avoid using these funds currently, you’ll hopefully have a nest egg when you’re old.

Retirement Planning News » Blog Archive » The Magic Numbers of …

Thu, 31 Mar 2011 10:00:08 +0000

We’re all searching for a formula for saving and investing that will deliver a secure retirement. But there are a variety of factors we can’t predict, including how the stock market will perform, how long we will live, and whether we will be forced into retirement before we’re ready. here are some key numbers from recent retirement research that can serve as guideposts for your planning:

[See 10 Ways to Boost Your Social Security Checks.]

4.6 years. This is the ideal job tenure workers between ages 50 and 61 need to prevent a layoff. An Urban Institute analysis of Census Bureau data found that 50-something workers with more than 4.6 years on the job were less likely to lose their jobs than younger new hires. Older employees with less job tenure were more likely to be laid off than similarly skilled workers in their 20s and early 30s. many older workers find themselves forced into retirement earlier than planned because of a layoff. “Fifty-something workers who are new to the job are more likely to be laid off than newly hired 30-year-olds,” says Richard Johnson, a senior fellow at the Urban Institute and co-author of the report. “The more job tenure you build up, the safer you’ll be when your employer needs to reduce payroll.”

20 percent. when laid-off men between ages 50 and 61 find new jobs, they are typically paid 20 percent less at the new job, according to Urban Institute calculations. Those who become reemployed at age 62 or older experience even steeper wage declines (36 percent). in contrast, wages fall only 4 percent among job changers between ages 35 and 49 after a layoff. “Most older workers have accumulated a lot of experience and skills that are quite specific to their job. These skills make them highly productive and raise their wages,” says Johnson. “But these skills aren’t as valuable after they leave their employer because some of the skills aren’t applicable to other jobs. so their new employers aren’t usually willing to pay them as much.” Women who change jobs in their 50s are typically paid 21 percent less in their new job. Those who begin a second career at age 62 or older fare better—they’re paid just 15 percent less.

$1,177. This was the average monthly Social Security payout at the beginning of 2011. you can get an estimate of how much you will receive based on your earnings history from the Social Security Administration website. For any income you need above this amount, you’ll have to fill the gap with your own savings, investments, or other sources of retirement income. The maximum possible benefit for a worker who retires at age 66 in 2011 is $2,366 per month. To get this amount, he or she would have to earn at least the maximum taxable amount for every year after age 21. The maximum taxable amount is 2011 is $106,800.

[Visit the U.S. News Retirement site for more planning ideas and advice.]

3 percent. Employers with Vanguard retirement accounts offered a median matching contribution of 3 percent for employees in 2009. To capture the match, workers had to contribute a median of 6 percent of their salary to the 401(k) plan. The most common 401(k) match formula is 50 cents for each dollar an employee saves, up to 6 percent of pay. However, Vanguard administered more than 200 match formulas, ranging from a maximum possible match of less than 1 percent to upwards of 10 percent of pay. The more your employer contributes to your nest egg, the less you’ll have to fund on your own.

4.3 percent. Early baby boomers born between 1948 and 1954 who lost money during the economic downturn must save 4.3 percent more of their annual pay to have a 90 percent chance of counteracting the impact of the financial and housing market crisis in 2008 and 2009 on their wealth, according an Employee Benefit Research Institute report. “When you figure out how much of a hit you took during those two years and spread it out over each year between now and 65, the people who are closest to retirement are going to have to save the most each year,” says Jack VanDerhei, EBRI research director and author of the report. Making up for retirement and housing losses will be easier for younger workers, whose portfolios have more time to recover before retirement. “If they had a 20 percent loss and spread that over 20 years, that’s only 1 percent more they need to save each year,” says VanDerhei. Late baby boomers will need to save 1.2 percent more to break even. Generation Xers only need to save 0.3 percent more to cancel out the impact of the financial crisis.

Article source: Google

Retirement Planning News » Blog Archive » The Magic Numbers of …