Have you ever wondered what happens to the money in a 401(k) once you leave a job?
Have you made the mistake of withdrawing it and got hit with taxes?
A 401(k) (or a 403(b) if you’re a teacher or work in a non-profit) is one of the most powerful investing accounts you can have. It lets you invest $19,000 every year, $24,000 once you turn 50. Which is a lot more than the $6,000 limit on IRAs ($7K after 50). You can only have access to a 401(k) if your job provides it. When you leave that job, you can take a lot of the money with you…and if you do it right, you avoid taxes.
What is a rollover? A rollover is a transfer from your workplace retirement account to an IRA (individual retirement account). This is a non-taxable event. Let’s say you have $10,000 from your first job from 3 years ago and now you work somewhere else. Just because you left the job doesn’t mean you have to leave the money. You can rollover the money into an IRA and pick the investments you want.
Why is a rollover important? First, it can help you keep your money organized. The average person has about 11 jobs between 18-48. That means you could have several accounts out there that you can’t monitor or easily make changes to. Second, once you leave that job you can no longer add money to it. If you roll the money over you can continue investing and grow your wealth. If you just withdraw the money you could get hit with a 20% tax. That $10,000 would immediate become $8,000.
How can I rollover my money? Here are steps to execute a rollover after you leave the job (you can’t really rollover money from a job you’re still at).
- Open an IRA (Charles Schwab, Fidelity, Vanguard ect..)
- Tell the brokerage company that you intend on rolling over money from a previous job.
- Call your old job to get any paperwork and send it to your brokerage company.
- Tell the brokerage that you want a “direct rollover”
- Sign off on the paperwork.
- Wait 5-10 business days.
- Choose how you want to invest the money
There are two types of rollovers. Direct which means the money goes directly into the new account. Indirect which means they mail you a check and you have 60 days to deposit it. If you don’t you will be taxed. I always recommend a direct rollover if your company does it.
How much does it cost to do a rollover?Nothing. If anyone tries to make you pay, run.
What should I do once it has rollover? Once the money is in your new account you can choose how you want to invest.You can pick stocks, mutual funds or a combination of both.If you need help putting together some ideas this resource may help you.
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