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401(k) Planning

401(k) Planning

A 401(k) is the most common form of retirement planning account. You can easily make contributions through automatic paycheck deduction; many employers also offer automatic matching. Your earnings are deducted before tax and are not taxable until after they are withdrawn, typically after retirement. At this point you are likely in a lower tax bracket, allowing you to save as much money as possible in your retirement savings account.

Rolling your 401(k) over comes with options. An experienced financial advisor can help you review your choices when it comes to making plans and provisions for your 401(k).

A Variety of 401(k) Rollover Options

When you leave an employer for non-retirement reasons, whether you are getting a new job or striking out on your own, you have four options for rolling over your 401(k). Each option comes with pros and cons.

  • Roll the Assets into an Individual Retirement Account (IRA) or Roth IRA: An IRA will give you the most control and choice, as they typically offer more investment options than a 401(k). In addition to a wide array of investment options, you have the choice of a traditional IRA or a Roth IRA, which allows you to choose between paying income taxes on the funds now or later. Your decision will depend on your current tax bracket, as well as the tax bracket you can expect to be in going forward.
  • Consolidate your 401(k) into your new employer’s plan: This might be your best choice if your new employer offers immediate rollover options. You will have the convenience of a manager taking care of things, plus you can contribute a lot more to a 401(k) every year than you can to an IRA.
  • Keep your 401(k) with your former employer: This might be a good option if your new employer doesn’t offer a 401(k) plan or offers one that is less advantageous. You won’t be entitled to any more company matches, but you might have access to more federal protections in case of bankruptcy or lawsuits. The merits of this decision depend on how much is in your 401(k) and what your new options are.
  • Cash out your 401(k): In most cases, cashing out your 401(k) is an unwise decision. You’ll be taxed on the money as ordinary income at your regular tax rate. If you’re no longer going to be working, you’ll need to be 55 or older to avoid paying an additional 10% penalty. If you’re still working, you’ll need to wait until age 59 ½ to be able to access your money without incurring an additional penalty. If you can afford to avoid cashing out your 401(k), you should do so. If you have been laid off and need cash, try to take out only what you need and roll the rest into an IRA.

Contact Our Financial Planner Today

If you need advice on 401(k) rollover options or would like additional advice as you plan, a professional financial planner can help you review your options and choose the best course of action. MSA Wealth Management is here to help. We serve clients throughout NJ. Reach out to our office today to schedule an appointment!

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