ProsThere are millions of reasons why setting up a 401k account makes sense. Medical advancements have exploded in the last decade, so if you are in your 30s now, you will probably live into your 90s. You need to start funding that future now. With the rollover option within 401k plans, keeping all of your money growing and working for you is easy.
ConsYou can think of thousands of reasons why you need every penny you make and then some, just for day to day living. Gas, groceries, clothing, all of these things get more expensive every day. Who can think about saving for retirement right now? Who has that kind of money? The answer is You do. You don't think it is true, but you can save for retirement and you should start today.
Full ReviewIt is important to save for retirement. I know that if you listen to the news, they'll tell you that Social Security's coffers will be empty by the time you are ready to retire and that it means we'll all be greeters at Wal-Mart in our golden years. The future does not have to look like that. If you save for retirement, you can be one of the lucky ones on the golf course instead of wearing a blue vest.
A 401k account is the primary way that most Americans save for retirement. Created in 1978, it has all but replaced pensions as the way that senior citizens pay for living expenses after they retire. The rules that govern 401k accounts are simple. You can put so much in each year and then, take the money out, with no penalty after you retire or reach the age of 70.5. The maximum for contribution is set by your employer or by the plan, the average max is 10% of your wages. The average 401k participant puts 6.5% of their wages in the account.
Since most Americans hold over three jobs in their lifetime, there are provisions for what are called rollovers. A 401k rollover is a very easy procedure. As you get ready to exit from your current employer, you contact your Human Resources or Benefits department and they will get your the form you need. There are a fedw 401k rollover rules to be aware of. First and foremost, if you have taken a loan against your 401k, the full amount is due within 60 days. Yes, the note for the loan is due within 60 days of your leaving the other job.
The second rule is that you can, during this transition time, cash out your own individual 401k account. This is not a wise financial move because you take an immediate 10% penalty on the dollars. Second, you will owe taxes on the full amount of the account, so when you add them together, it is probably going to add up to 40% of the money you had in there. Almost half of the money, so ask yourself if it is worth it.
Lastly, the rules give you three places to go with the money. It can go into a new 401k plan. This would happen, of course, if you are changing jobs. A simple one-page form will get your money from one plan to the other. You can choose to do a 401k rollover-IRA. Whether you are unemployed, now working for yourself or changing jobs, you can opt to put the money in an IRA. One major advantage of a move like this is that you have control over the funds and how they are invested. There is a bit of paperwork involved -- you need to set up the IRA ahead of time. You can decide to do a 401k rollover-Roth, as well. A Roth account, unlike 401ks and IRAs is funded with post-tax dollars. So when you are ready to withdraw the money, taxes are done. There are pros and cons to this. You are currently in a higher tax bracket than you will be when you retire. On the other hand, a hidden expense for Seniors is the taxes due on the withdrawals from retirement accounts.