When it comes to retirement savings, you have options for what to do with your 401k when you leave a job. One option is to roll it over into another qualified retirement plan, such as an IRA or a new 401k with your new employer. This allows you to keep your retirement savings growing tax-deferred or tax-free, depending on the type of account you choose. It’s important to consider factors like investment options, fees, and tax implications before making a decision. If you’re not sure what the best option is for you, consider speaking with a financial advisor or tax professional.
Traditional IRAs
Traditional IRAs are individual retirement accounts that offer tax-deferred growth. Contributions to a traditional IRA are made with pre-tax dollars, meaning they are deducted from your taxable income. Earnings on the investments within the IRA grow tax-deferred until you withdraw them in retirement. At that time, withdrawals are taxed as ordinary income.
There are no income limits for contributing to a traditional IRA, but there are annual contribution limits. For 2023, the annual contribution limit is $6,500 ($7,500 if you are age 50 or older). In addition, there are income limits for deducting traditional IRA contributions. For 2023, the phase-out range for deducting traditional IRA contributions is $73,000 to $83,000 for single filers and $116,000 to $136,000 for married couples filing jointly.
Traditional IRAs offer several advantages over 401(k) plans. First, traditional IRAs offer more investment options than 401(k) plans. This gives you more control over your investments and allows you to customize your investment portfolio to meet your specific needs.
Second, traditional IRAs have no required minimum distributions (RMDs) during your lifetime. This means you can leave your money in the IRA and continue to defer taxes on the earnings until you need it.
However, there are also some disadvantages to traditional IRAs. First, withdrawals from a traditional IRA are taxed as ordinary income. This means that you will pay taxes on the earnings when you withdraw them in retirement, even if you are in a lower tax bracket than you were when you made the contributions.
Second, traditional IRAs have income limits for contributions and deductions. This means that if you earn too much money, you may not be able to contribute to a traditional IRA or you may not be able to deduct your contributions.
| Feature | Traditional IRA | 401(k) Plan |
|---|---|---|
| Investment options | More investment options | Limited investment options |
| Required minimum distributions (RMDs) | No RMDs during your lifetime | RMDs begin at age 72 |
| Taxes on withdrawals | Withdrawals are taxed as ordinary income | Withdrawals are taxed as ordinary income |
| Income limits for contributions | No income limits for contributing | Income limits for contributing |
| Income limits for deductions | Income limits for deducting contributions | No income limits for deducting contributions |
Roth IRAs
Roth IRAs are a type of individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars, meaning you don’t get an upfront tax break. However, once your money is in a Roth IRA, it grows tax-free and you can withdraw it tax-free in retirement, regardless of your income.
There are income limits for Roth IRAs. In 2023, you can contribute to a Roth IRA if your modified adjusted gross income (MAGI) is less than $138,000 for single filers and $218,000 for married couples filing jointly. If your MAGI is above these limits, you may be able to make a reduced contribution.
- Benefits of Rolling Over to a Roth IRA:
- Tax-free growth
- Tax-free withdrawals in retirement
- No required minimum distributions (RMDs) in retirement
- Drawbacks of Rolling Over to a Roth IRA:
- You’ll have to pay income tax on the amount you roll over
- There are income limits for Roth IRAs
- You may not be able to roll over all of your 401(k) money to a Roth IRA
| Traditional IRA | Roth IRA | |
|---|---|---|
| Contributions | Made with pre-tax dollars | Made with after-tax dollars |
| Growth | Tax-deferred | Tax-free |
| Withdrawals | Taxable in retirement | Tax-free in retirement |
| RMDs | Required starting at age 72 | No RMDs |
| Income limits | No income limits for contributions, but income limits for deductions | Income limits for contributions |
Employer-Sponsored Plans
If you leave your job or retire, you may be able to roll over your 401(k) into an employer-sponsored plan. This option is only available if your new employer offers a plan that accepts rollovers.
Employer-sponsored plans include:
- 403(b) plans
- 457 plans
- Thrift savings plans (TSPs)
There are some benefits to rolling over your 401(k) into an employer-sponsored plan. These benefits include:
- You may be able to get a lower expense ratio.
- You may be able to invest in a wider range of investments.
- You may be able to take advantage of employer matching contributions.
However, it is important to compare the terms of the two plans carefully before you make a decision.
Here is a table that summarizes the benefits and drawbacks of rolling over your 401(k) into an employer-sponsored plan:
| Benefit | Drawback |
|---|---|
| Lower expense ratio | May not be as many investment options |
| Wider range of investments | May not be eligible for employer matching contributions |
| Employer matching contributions | May have to pay a fee to roll over the money |
Annuities
Annuities provide another option for those seeking a steady stream of income in retirement. With an annuity, you can purchase a contract with an insurance company that guarantees a set amount of income for a specified period or for your lifetime. Unlike investments like stocks or bonds, annuities offer a level of certainty that your income will continue to flow regardless of market conditions.
Considerations for Annuities
* **Longevity risk:** Annuities can help reduce the risk of outliving your savings, but it’s essential to consider your life expectancy. If you die before the annuity period ends, you could lose a significant portion of your investment.
* **Cost:** Annuities typically come with fees and expenses, which can reduce your overall investment. Compare different annuities to find the most cost-effective option.
* **Limited flexibility:** Annuities are often less flexible than other retirement accounts. Once you purchase an annuity, you may have limited options for accessing your funds.
Thanks for reading about the many options you have for rolling over your 401k. I know it can be a lot to take in, but I hope this article has given you a better understanding of your choices. If you have any more questions, please don’t hesitate to reach out to a financial advisor. In the meantime, be sure to check back later for more articles on personal finance and investing.