If you have a few 401(k)s from old jobs lying around, should you be consolidating them into your current 401(k) plan? There are definitely advantages to combining these accounts, but you’ll want to make sure you’re merging into a good plan by avoiding excessive fees and limited investment options.Read more...
More like this (3)
If you lost your job during the pandemic, rolling over your 401(k) to an IRA can help you keep track of your retirement savings
Moving your 401(k) from your old job to an IRA through a rollover could be...Moving your 401(k) from your old job to an IRA through a rollover could be the right move if you're not sure when you'll go back to work. IRAs often have lower and more transparent fees than a 401(k), and a bigger variety of investment options can make them more personalized. You can always roll your IRA funds into a new employer's 401(k) in the future, or keep saving in your IRA. Use Blooom to analyze your 401(k) today and see how you can grow your retirement savings » If you've recently been laid off from a job with an employer-sponsored retirement account, it's time to consider making a change to your 401(k). A 401(k) is a type of retirement account offered through an employer, and funded through withdrawals from your paycheck. After you've left your employer, you won't be able to keep funding that retirement account. To keep doing so, you'll need to move the money into another type of investment account. For that, you might want to consider an IRA. An IRA is the best option for anyone unsure when they'll return to work An IRA is an individual retirement account that can allow you to keep saving for retirement, even without an employer. This type of investment account can be opened on your own through a brokerage firm of your choice. "We have seen a relatively large uptick of people rolling over 401(k)s into their IRAs," says Bobby Glotfelty, a senior licensed financial professional with Series 7, 24, and 65 licenses at Betterment. "A lot of these cases are people who are no longer employed or are still looking for employment." Leaving your old 401(k) at your old employer's provider won't do much to help your money grow. "By moving into an IRA, you generally have more investment options than you would with a 401(k). Often, 401(k)s restrict you on what you can invest in," Glotfelty says. With more investment options, like index funds and ETFs, you can invest more specifically to your goals. "By switching to an IRA, a lot of times you'll find lower fees," Glotfelty says. "It's easier to figure out the fees you actually pay within an IRA." Lastly, your IRA is a good tool to keep retirement money in one place, which can be especially helpful after you've had several jobs. Keeping all of your retirement money in one place can help you better assess where you are in relation to your goal, and how much more you need to save — plus, one retirement savings account is easier to keep track of than multiple. You can keep your IRA when you start a new job, or switch to a new 401(k) When you do go back to work, there are options for your new 401(k) as well. "You can always roll your IRA assets back into your new employer's 401(k)," Glotfelty says. If you're able to keep saving in either type of retirement account, doing so will benefit you in the long run. Retirement accounts grow through compound interest, where money grows over time. Putting in money now with more time to grow will ultimately result in a higher account balance than putting in the same amount later. "In almost all cases, rolling retirement funds over to an IRA makes sense," Glotfelty says. Related Content Module: More Investing CoverageJoin the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid
A 401(k) is an employer-sponsored retirement plan that makes investing simple. To invest in a 401(k),...A 401(k) is an employer-sponsored retirement plan that makes investing simple. To invest in a 401(k), you need to make three decisions: how much of your salary you want to contribute, which funds you want to invest in, and what percentage of your contributions should go toward each investment. Generally, it's best to avoid funds with expense ratios above 1%, unless your company offers a contribution match that's higher than the fee. You can change your contribution rate and manage your investments at any time through your account on the plan provider's website. Coming soon: the Personal Finance Insider email. Sign up here » Though it's synonymous with retirement savings, the 401(k) plan is the best way to start investing, whether you're in your 20s or your 40s. A whopping $6.2 trillion was held in 401(k) plans by March 2020, accounting for nearly one-fifth of all retirement assets in the US, according to the Investment Company Institute. 401(k)s make investing simple by directing part of your salary into an investment account and paring down investment options. How to invest in a 401(k) 1. Find out if you've been automatically enrolled Many companies have an auto-enrollment feature in their 401(k) plans. Unless an employee opts out or changes their deferral rate, a predetermined portion of their pretax paycheck will be contributed to their 401(k). The default contribution rate varies depending on the company's plan specifics, but typically ranges from 2% to 5%. To find out if you're enrolled in your company 401(k), check your pay stub or contact your human resources team. 2. If not, enroll now If you're not already enrolled, your human resources team can give you the instructions or forms you need to do so. 3. Find out if you have a company match Ask your human resources team or check the 401(k) plan documents to find out if your company offers an employer contribution match and exactly how it is calculated. An employer match is free money. To qualify to get the free money, you'll need to defer some of your own salary into your 401(k). For example, an employer may promise to match 100% of its employees' contribution, up to 3% of their salary. That means if an employee who earns $60,000 a year contributes 10% of their salary ($6,000), the employer will contribute $1,800 (3% of $60,000) for the year. Minimally, many financial experts recommend contributing enough money to your 401(k) plan to qualify for your employer match before turning your attention to other tax-advantaged retirement accounts. Are you saving enough for retirement? Find out with this calculator from our partners: 4. Understand your company's vesting schedule Any contributions you make to a 401(k) are yours to keep, though you won't be able to access the money before age 59 and a half without incurring a penalty and/or paying income tax. That said, any contributions your employer makes to your 401(k), including matches, may not be yours right away. Your 401(k) plan's vesting schedule outlines exactly when your employer's contributions will be yours. You can contact your human resources team to find out about your company's vesting schedule. Most 401(k) plans have either cliff vesting or graded vesting. A cliff means that contributions made by the employer won't be the employee's to keep until they've worked at the company for a specific period of time, usually two or three years. Graded vesting means that a specific percentage of the employer's contribution vests each year the employee is at the company. For example, your company's 401(k) plan may have four-year graded vesting — after one year of service, 25% of their contribution is yours; after two years of service, 50% of their contribution is yours; after three years of service, 75% of their contribution is yours; and finally, after four years of service, 100% of any past and future contributions are yours to keep and invest in your 401(k). If you leave the company before your vesting period is up, you'll lose any portion of your employer's contribution that isn't already vested. 5. Choose your deferral rate A lot of people get caught up deciding how much to contribute to their 401(k), but anything is better than nothing. The good news is your deferral rate — the amount of your paycheck that's deferred from income taxes — is not set in stone. Most plans will allow changes to the deferral rate (also called a contribution rate or savings rate), at any time, though it could take up to a month to go into effect. In 2020, the IRS allows employees to contribute $19,500 to a 401(k), plus an extra $6,000 for folks over 50. To max out your 401(k) this year, you'd need to contribute about $812 every paycheck (assuming 24 bi-monthly paychecks over the course of the calendar year). 6. Choose a beneficiary You'll also need to name a beneficiary — the person who would inherit your 401(k) in the event of your death. It can be changed later if needed. 7. Browse investment offerings and pay attention to fees The investment options in a 401(k) are carefully selected by the employer. Most 401(k) plans offer between eight and 12 investment options, which can be a mix of mutual funds, stock funds, bond funds, and even annuities. There are two general types of fees you will see in your account: Account management fee charged directly by the 401(k) plan provider Fee charged by the mutual funds and ETFs in your 401(k) account (expense ratio) If you're investing in your 401(k), the account management fee is unavoidable. If your provider is charging a management fee above 1% of your account assets, you may consider directing your savings elsewhere, such as an IRA with lower fees. However, it could be worth contributing if your employer offers a match that is higher than the provider's management fee. Most mutual funds charge a management fee, too. This is listed on each investment fund as the expense ratio, or the fee rate as a percent of assets. Again, look for funds with an expense ratio below 1%, otherwise the fees could start eating into your returns. 8. Choose your investments Aside from fees, there are two important factors to consider when choosing specific investments: your time horizon (how many years you have until retirement) and your risk tolerance (how much risk you can withstand). If you have decades to invest before you need retirement income and are fairly risk tolerant, you may choose a fund with more stocks, as they're considered riskier than bonds. Some 401(k)s offer "all-in-one" target-date funds that automatically rebalance to fit into your time horizon. You may see them labeled as "Target" or "Retirement Fund," plus a year. For example, a "Target 2040" fund is made up of a blend of investments that assumes retirement in the year 2040, so investments will need to be as conservative as possible by that time. You don't have to choose a target-date fund that matches your actual retirement age. 9. Choose how much of your contributions should be invested in each fund As you choose your specific investments, you'll decide how much of your contributions will go toward each investment, usually expressed as a percentage. If you only choose one fund, 100% of your money will be invested in that fund. If you create a portfolio with three different funds, you can decide what percentage of your contributions will go toward each fund. 10. Log on to your account through your plan provider's website to periodically increase your contribution rate and manage investments You can change your contribution rate and manage your investments by logging on to your account through your plan provider's website (e.g. Vanguard, Fidelity, etc.). Most experts suggest increasing your 401(k) contribution rate at least once a year, or each time you get a raise. Related Content Module: More Savings CoverageJoin the conversation about this story » NOW WATCH: Pathologists debunk 13 coronavirus myths
A SIMPLE IRA is a tax-deferred retirement savings account. It's similar to a 401(k) but...A SIMPLE IRA is a tax-deferred retirement savings account. It's similar to a 401(k) but it's designed for small businesses with fewer than 100 employees. It has different contribution limits and different employer-contribution requirements than a 401(k). Use Blooom to analyze your 401(k) today and see how you can grow your retirement savings » Understanding the world of retirement savings accounts can be intimidating, but of all the options available, the SIMPLE IRA seems to be the one that most folks know the least about. That makes total sense, given that this account is one of the newer types available and applies to fewer people than, say, a traditional IRA or a 401(k). But if you're eligible for its services and equipped with an understanding of its perks, the SIMPLE IRA can prove incredibly beneficial, so read on for all the information you need to make the most of this innovative account. What is a SIMPLE IRA? The SIMPLE IRA is a tax-deferred retirement savings plan established by the Small Business Job Protection Act of 1996. As you've probably gathered from the capitalization, the name is an acronym — it stands for Savings Incentive Match PLan for Employees. (And of course, IRA stands for "individual retirement account.") These accounts are designed expressly for small businesses with 100 or fewer employees that don't offer a qualified retirement plan like a 401(k) or a 403(b), and are run through participating financial institutions. For ease of use, the SIMPLE IRA requires less paperwork than its more elaborate cousins, and has aspects drawn from both traditional IRAs and employer-sponsored accounts. How does it compare to other retirement accounts? Just like with the traditional IRA, contributions to the SIMPLE IRA are tax-deferred, meaning you won't be taxed on the funds until it comes time to withdraw them. Additionally, employees can contribute to the accounts themselves, and always maintain full ownership of the contents of their SIMPLE IRAs. The SIMPLE IRA has a great deal in common with the 401(k), like the fact that employers can also add to the account in the form of matching contributions. But the small business-centric accounts actually take this facet one step further by making these contributions a requirement instead of an elective that varies from company to company. Employers that offer a SIMPLE IRA are presented with two contribution options — they can either match contributions of up to 3% of an employee's annual salary, or offer a 2% nonelective contribution. (The latter option meaning that your company will automatically contribute that 2% amount even if you, the employee, don't make a contribution of your own.) Your employer is obligated to contribute to your SIMPLE IRA every year until the account is terminated, but it's worth noting that they can change their contribution decision at any time. They are required to notify you of any changes, however, so make sure you're up to date on your office's policies so you can make the most of your retirement savings. Also, unlike a 401(k), a SIMPLE IRA can't necessarily be rolled over into a traditional or Roth IRA immediately after your departure from the company. This transition can eventually take place, but it requires a two-year waiting period from the time the account was opened. So if you left your job within that two-year window, you'll have to wait it out before rolling over your SIMPLE IRA. Additionally, Simplified Employee Pension (SEP) IRAs and traditional IRAs cannot be rolled over into SIMPLE IRAs. Do I have to choose one or the other? Yes and no. You don't have to choose between a SIMPLE IRA and an individual retirement account like a Roth or a traditional IRA. But since these accounts are intended specifically for small businesses that don't provide employee-sponsored retirement accounts, if your employer offers a 401(k) or similar plan, you cannot also take advantage of a SIMPLE IRA. Who is eligible for a SIMPLE IRA? There are just two requirements to determine SIMPLE IRA eligibility. The first is that you must work for a small business — typically defined as one that staffs 100 or fewer employees. The second is that you must have earned at least $5,000 from your employer in each of the previous two years, and expect to earn at least $5,000 in the current year. How much can I contribute to my SIMPLE IRA? Like many other retirement accounts, the IRS places annual limits on employee contributions to SIMPLE IRAs. For 2020, that limit is $13,500, which is significantly higher than the maximums placed on individual retirement accounts, but lower than the cap on 401(k) contributions. Also, those aged 50 and over are granted an additional catch-up contribution of $3,000, bringing their yearly maximum up to $16,500. When can I withdraw my money? While you can theoretically withdraw funds from your account at any time, you should do your best to wait until age 59 1/2 to take the first disbursement from your SIMPLE IRA. That's because unless you qualify for an exception, disbursements taken before that point are subject to an additional 10% tax. (Which comes on top of the funds being taxed as income.) Even more crucially, that fine increases to an additional 25% tax if you dip into the funds within the first two years of enrollment in your SIMPLE IRA. (A time frame that begins with your employer's first contribution to your account.) Because these early withdrawal penalties are so steep, it's important that you're only setting aside those funds that you're comfortable parting with long-term. How can I invest? For employers, establishing a SIMPLE IRA for your workers is as simple as filling out a form — Form 5304-SIMPLE if you want employees to be able to choose the financial institution where their accounts will live, or 5305-SIMPLE if you wish to make that choice yourself. And for employees, participation is as simple as filling out a SIMPLE IRA adoption agreement at your place of work. Once you're enrolled, you should be able to choose one of the investment options on offer through the selected financial establishment, where your money can grow steadily until it's time for retirement. More savings and retirement coverage How to retire early The best high-yield savings accounts right now How to calculate how much money you need to retire The banks with the best CD rates Join the conversation about this story » NOW WATCH: Why electric planes haven't taken off yet