Investing in your future seemed like a good idea. You've paid into your employer's 401(k) fund for a while now, slowly building a "nest egg" for those golden years. Except that now you are facing an uncertain future. Especially if you are one of the millions of baby boomers set to retire soon. Perhaps the rough economic times caused your company to downsize you right out the door? What are you doing with your 401(k) fund? Are you thinking of "rolling over" your 401(k) fund? Going to just leave it there until you need it? What about a lump sum withdrawal? After retiring or leaving a company you have to make a decision as to what to do with the money inside of your 401(k) plan. You generally have three options when withdrawing funds from your 401(k) account - lump sum withdrawal, leave it in the plan, or direct rollover. While they all have their advantages, some are more advantageous than others. Lump Sum Withdrawal: While this may seem like the most appealing option - getting all of your money at once, it isn't as rosy as first appears. Since the money you put in your 401(k) plan is not taxed in any way going in, it is all 100% taxable on the way out. Making a lump sum withdrawal means it'll be time to pay the tax man for all that money. Now, if your 401(k) is rather small, it may not matter to you. If, however, you've been paying in for years and you've got quite a bit of cash stashed in your 401(k), the taxes could be prohibitive. You'll have to pay both state and federal income taxes on the entire balance. If you are below the age of 59 1/2, in addition to paying income taxes on your 401(k) funds, you will also have to pay a 10% excise tax as penalty for premature withdrawal. Having a big wad of money may be appealing if you don't mind sharing some of it with the government, but if you do, then a lump sum withdrawal may not be the best option for you and your 401(k). Leave it in the plan: You have the option of not touching the money inside of your 401(k) plan, even if you are no longer employed by the company. If you elect to leave your money untouched, your funds are still governed by the rules and guidelines of the 401(k) as it was set up. Every 401(k) plan has what's called the plan document, which lays out the ground rules for how often you can change your investment selection, how often you can withdrawal money, etc. You'll still have to follow these guidelines, and pay any fees or penalties for not following them. You will also be limited in your investment options. Typically a 401(k) plan will have 8-15 different options available to choose from. Maybe you like them, maybe you don't. In today's rough and rocky economic times, some of them may be better investments than others. This option does have its benefit, however. Choosing to leave your money in the existing 401(k) fund means you aren't required to pay the annual fees associated with the plan. This can typically save you $40 or so a year. If your 401(k) is on the small side, say under $10,000, then leaving it untouched, right where it is, may be the best option for you. Direct Rollover: By far the best option for your old 401(k) fund is the rollover. You can establish a traditional IRA (Individual Retirement Account) and simply transfer the entire 401(k) fund into it. Since an IRA (Individual Retirement Account) has the same tax benefits of a 401(k), (they are both considered "qualified" accounts,) there are no tax consequences for choosing this option. There is also no 10% excise tax if you are under 59 1/2, since it is a direct rollover. You also have better control of your investments, since once the money is in your IRA you have complete control of how you invest your money (to some degree). For example, you can invest in Mutual Funds, Stocks, Bonds, Cash or many of the traditional investment arenas. One thing to note - IRA's do carry many of the same penalties and guidelines as 401(k) funds, such as the early withdrawal 10% excise tax. Rolling over your 401(k) into an IRA is relatively easy to do, too. Any traditional brokerage firm, like Charles Schwab, as well as many of the newer online firms, such as Ameritrade, offer IRA services. The three options for your 401(k) are relatively simple and easy to understand. You'll have to decide which is best for you and your situation. While your future may be a bit uncertain, there need be no uncertainty as to the future of your retirement investment.
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Investing in your future seemed like a good idea. You've paid into your employer's 401(k) fund for a while now, slowly building a "nest egg" for those golden years.
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