Difference Between a Roth IRA and a Roth 401(k)

Many people can find similarities between a Roth 401(k) and a Roth IRA. Each contribution for each type of account will be made after taxes have been completed. The earnings from these accounts can be removed without being taxed at the age of 59 ½. Though these accounts have many parallels and similarities, they are also very different in a few key features.

How much is contributed

One of the biggest determining factors of a 401(k) is its contribution limit. Usually, the contributions have a high limit, which allow employees with a 401(k) plan to save around $18,000 annually. For a worker is over the age of 50, the limit for contributions made per year is $24,000 because of the catchup contribution caveat. IRAs have smaller contribution limits per age range. The typical limit is $5,500, but if you are employed and you are over the age of 50, you have the potential to contribute $6,500 to your IRA a year.

How its Distributed

One of the best parts of a Roth IRA is how the account can go on forever, and no minimum distributions are required at a certain age. It can also be passed along through generations, which can accumulate free earnings for each generation.

A Roth 401(k) is completely different, though. Once you reach the age of 70 1/2, this type of account will actually require distributions to be made. This might not necessarily be a bad thing if you are in the position where you need the money. If you want tax-free savings, though, there is a way to get around it. Rolling over to a Roth IRA will be better in this situation. The person in charge of the account has the option of switching their account, but it’s up to the needs of the person in charge.

Options for Investment

Account holders who want to invest into their accounts are given way more control over their Roth IRA than their Roth 401(k). People looking to invest are given many different options when it comes to investing. They can invest in stocks and bonds, for example, but the control over the funds that an employer can offer becomes extremely limited when making investments for a 401k plan. Employees can increase their options when they maximize their employer’s match and then use extra money towards their Roth IRA. This gives the employee the option to have full access to IRA options for investment they otherwise would not have had because of the restrictive employer’s plan.

Limits on Income

Contributions to a Roth IRA are off-limits when the modified gross income is at least $196,000 after it’s adjusted, and you are married or filing with a significant other. If you are filing IRA contributions with a significant other or a spouse, the limit goes beyond at least $133,000. This is a drawback of using a Roth IRA. With a Roth 401(k), there is no limit on income.

How to Rollover 401k to IRA

After leaving a job, you may be wondering what on earth you should do with your old 401(k) funds. There are a few options to consider, each with their pros and cons. Always consult your financial advisor before transferring funds, as they can offer advice on which type of transfer is best for your stage of life and how to move the funds hassle-free. Your 401(k) options include:

    • Keeping your funds where they are
    • Rolling the funds into an IRA or Roth IRA
    • Transferring the funds into your new 401(k)
  • Cashing out

If you keep the funds where they are, your old employer won’t make any matching contributions, and you may not be able to make any contributions yourself depending on your employer’s specific rules. You will also be limited to the plans they provide or the fees they entail, which you may or may not like. Consolidating your 401(k) funds into a plan of your new place of employment will keep things simple and all in one place. If you change jobs frequently, having multiple plans sitting at each old place of employment may get confusing.

Cashing out is usually only utilized as a last resort option. You may be subject to a 10% fee if you are younger than 55 or between 55 and 59 but still working. You can avoid the 10% fee if you are older than 59 ½ or you are between 55 and 59 but are retired. What you withdraw will also be counted as taxable income and may bump you to a higher tax bracket. If you need to supplement your income until you have a steady stream once again, most advisors suggest only withdrawing the absolute minimum necessary and rolling over the rest into an IRA.

Rolling Over a 401(k) to an IRA

If your employer writes a check directly to you for the funds in your 401(k), you will have 60 days to deposit those funds into a new qualified plan. Failing to deposit the funds within 60 days will result in taxation on the funds since it will be considered income, as well as a 10% fee if you are not 59 ½ yet. Furthermore, the IRS requires that your employer withhold 20% of the funds just in case you don’t make the deadline, so they are guaranteed their tax money. If you make the deadline, however, you should receive the 20% back at tax time. You can avoid all of this by doing what’s called a “direct transfer” from the 401(k) account into your new IRA account. This is usually done electronically as long as you have an account set up with a qualified institution already.

If you transfer a standard 401(k) into a Traditional IRA or a Roth 401(k) into a Roth IRA, everything should go smoothly. If you transfer a standard 401(k) into a Roth IRA, you will likely owe taxes on the amount. This may be advantageous if you are expecting the tax rates to be higher than they are now at your retirement since Roth IRA distributions are tax-free. Before converting, always seek the advice of your financial advisor.

What Happens to My 401(k) Plan If I Switch Jobs?

When you feel it’s time to change jobs so you can live up to your fullest potential, there are some lingering questions that may keep you hesitating. One of these is typically about what happens to your retirement savings when you switch companies. It’s your money and you need to be aware of how you can get access to it when you make the switch. 

There are typically four ways in which you can deal with a 401(k) retirement plan when you switch employers. Each one of these comes along with their own benefits and their own downfalls. We encourage you to weigh all of the options before making a final decision, so you don’t regret your decision later down the road. Let’s take a look at what these options are. 

1.) Liquidate For Cash

The first option you will always have is to liquidate your 401(k) to receive a payment in cash. This comes with the benefit of receiving your savings in cash. The downfall of this approach is you are subject to State and Federal Withholding Taxes and possibility an early withdrawal penalty. The Federal Withholding Tax is 20 percent of the amount in the account and the State requirements differ. If you are under the age of 59.5, you are subject to a 10 percent early withdrawal penalty when you cash out.

2.) Rollover To Your New Employer

Most companies will allow you to rollover your 401(k) from your previous employer. You should check with your new employer to ensure this is an option for you. With this option, you don’t have to worry about paying taxes just yet or any sort of withdrawal penalty. 

3.) Rollover Into A Traditional IRA 

If your new employer doesn’t allow you to rollover your 401(k) from your old employer, you have another option. You can rollover your existing 401(k) into a traditional IRA account. This is also a feasible option for those who simply don’t like their new employer’s 401(k) funding options. By rolling your money over into an IRA, you have the added option of choosing from a larger scale of investing options. Realize that once you rollover your old 401(k) into an IRA account, you probably won’t be able to roll it back over into a 401(k) account in the future. This is simply due to the fact that many 401(k) plans don’t accept IRA rollovers. 

4.) Leave Your 401(k) With Your Old Employer 

Depending on the options you have with your old employer, they may allow you to keep your 401(k) with them. This is typically under the assumption that the account is left as-is, meaning no more contributions can be made. This is always an option you can look into if you are not quite sure what you want to do with your 401(k) yet. 

Understanding more about 401(k) accounts and how they operate is the key to making them work for you. Anytime you switch employers you should always consider what you want to do with your existing 401(k). Be sure to assess your options above and make the best choice depending on your situation.

This Is Why Your Employer Should Offer a 401(k)

Offering a 401(k) has now become standard practice for many businesses, regardless of what size they are. As employees start to realize the many advantages that 401(k) plans have over other types of retirement savings accounts, they are factoring the availability of one through employer benefits when deciding on which job they would like to take. Business owners are realizing this shift in need from employees and have indulged in creating 401(k) plans as they provide many benefits for the business as well. Let’s see what some of these benefits are below. 

Business Tax Savings 

Businesses can experience tax savings from offering 401(k) plans in three different ways. These include the EGTRRA Tax Credit, contributions tax deduction, and reduction of payroll taxes due annually. Let’s take a look at how each one of these tax savings work.

First, we have the EGTRAA tax deduction, which stands for Economic Growth and Tax Relief and Reconciliation Act. This allows small businesses an annual total tax credit of up to $500 for the first three years of instituting a retirement savings plan. The tax credit is equal to 50 percent of the cost of creating and administering a 401(k) savings plan. Only small businesses with less than 100 employees qualify for this tax credit. 

When a business decides to contribute to their employees 401(k) plans, they immediately qualify for a tax deduction. All the contributions that are made throughout the year can be deducted up to applicable limits. Lastly, when employees make contributions to their 401(k) plan, it’s from their before-tax income. This means the salary listed on the payroll sheet for the business will display the amount the employee made after their 401(k) contributions. This could potentially translate to a reduction in payroll taxes due annually.

Employee Recruitment And Retention 

In most situations, employees have many options when it comes to finding a job they want. This has led more employers to come up with great benefits to successfully recruit experienced staff. Having an established 401(k) retirement savings plan is a must for any business that wants to recruit and retain productive and knowledgeable employees. 

More Affordable Than Ever Before 

As employee pension plans are finally phasing out, the 401(k) is becoming the most popular form of retirement investing. This means that more affordable options are coming out to business owners who are looking to institute this type of employee benefit. No longer do business owners need to struggle with paying tons of money to financial advisors. Now, they can simply design and maintain 401(k) plans for their employees through simple web-based applications. 

As you can see, there are many reasons why business owners should seriously be thinking about offering their employees a 401(k) plan. These are not just great for the employees, but they are fantastic for the employers as well. We highly encourage any business owners out there who are not currently offering this type of retirement program to seriously look into doing so

Is Your 401(k) Being Mismanaged?

Maximizing the money you invest in your 401(k) is important to your future. The choices that are made concerning your 401(k) have a drastic impact on your retirement. It’s important that you take the time to understand your own plan so you can assess whether or not your employer’s 401(k) plan manager is doing a good job preparing your future. 

Who Manages Your 401(k) Plan? 

If you work at a medium or small-sized business, it’s likely that the business owner or senior manager takes care of the 401(k) administrating. These individuals don’t typically have any financial background experience in investing. Most of these businesses want to offer the benefits of 401(k) plans to their employees, but they lack the funding of hiring an experienced financial advisor.

While setting up a 401(k) plan is fairly simple for any amateur to do, running the plan is another story. Many of the persons in charge of running these small business 401(k) plans don’t understand how to compare vendors, pick the most suitable investment menu, and other essential tasks to maximizing the earnings for the plan owner. In addition, realize that since the business owners and senior managers have many other duties as part of their job, it’s safe to say that the company’s 401(k) plans can be neglected from time to time when more important matters come up. 

Negative Impacts On Your 401(k) Plan 

Having a person with financial experience managing your retirement account is a necessity. If your account is being managed by someone with a limited financial planning background, they may be making poor choices. This could lead to investing in bad options, being charged too much from a vendor, and others. It’s important to realize that even a one percent decrease in your funding performance could equate to a large decrease in your retirement funds. 

What Should You Do? 

The first thing you should do is to become more educated about 401(k) plans. You should read over the documents you were given by your employer about your retirement account. This will help you to become more familiar with your account options, investments, and fees. 

If you find that you’re not totally happy with the design of the 401(k) plan, you have a few options. You can talk to other colleagues to see if they would be interested in approaching the company in a group setting. You can always speak to your employer about potentially changing the design of the 401(k) plans that they offer. Lastly, you can always opt to roll your 401(k) with the employer over to your own IRA account. 

Your 401(k) is a vital aspect of your future after retirement. If your account is mismanaged during your working life, it can drastically impact your ability to retire when you come of legal age. You should try to learn as much as possible about your own 401(k) account and be an active participant in setting yourself up to maximize the growth potential of your account .

How to Choose a 401K Plan: Three Factors to Consider

If you’re lucky enough to work for an employer who offers a 401k plan, you’re already ahead of the retirement options curve than most people. A nice perk to most 401k plans is that your employer will typically match up to a certain percentage that you contribute. For instance, if your employer offers a 6% match option, any contribution you personally make up to 6% will essentially be doubled. If you contribute 4%, your employer will contribute 4% as well. If you contribute 8%, your employer will still only contribute that 6% maximum. It is usually recommended that you contribute at least what your company is willing to match because you will be doubling your investment every year at minimum. If you don’t, you’re effectively refusing free money. Having a 401k plan can be a great way to save for retirement. However, if your company offers more than one option, or twenty options, things can get confusing. A mistake people often fall into is just picking one randomly and hoping it works out. Explained below are a few factors to consider before you decide which investment option is best for you.

  1. Your age can determine a lot about how you should invest. Your portfolio should consist of at least a few different investments to increase your chances for growth and also to spread out your risk. Your age will determine the allocation of the funds to riskier investments versus safer investments. If you’re getting started early in life, time can be on your side with the riskier, but highly rewarded, options. If the market dips for a few months, you’ll have time to wait for an upswing and rebuild your wealth. The closer you get to retirement age, the fewer risks you’ll want to take with your soon-to-be needed funds. The portfolio balance should swing from mostly risky in your early life to mostly safe later in life. Your financial advisor can help you determine the balance that is right for you personally. The safer options won’t include as much reward, but you’ve hopefully built a strong account up to that point.

Your age may also determine how much you contribute to your account each year. The earlier you invest, the more time it has to grow. A person who consistently invests a little starting in their 20’s can still earn more by retirement than one who contributes a lot only at the end of their career. If you’ve put off saving for retirement, you may need to contribute more to catch up to your retirement goals.

  1. What you invest in could be restricted to only a few options by your company. Sometimes companies will choose plans that offer investments in their industry, while others prefer U.S. based companies regardless of niche. Plans also may necessitate a minimum initial investment. Some can be $1,000 while others will require $25,000 or more. If you’re just starting out, you may need to build up to the higher investment plans.
  2. Benefits and fees may also help you narrow down a plan. Some plans may offer in-person advice or personal control over the investment, but come with higher fees, while others have automatic or target-date options with fewer associated costs. You may also possess certain knowledge over specific niches that you’re more comfortable investing with, such as technology. In the end, it’s your money and you should feel at least somewhat comfortable with the investment options presented to you.

Four 401K Fees You May Not Know You’re Paying

Everyone knows they should be saving for retirement. Some are closer to their goals than others, and some may even know the difference between an IRA and a 401K, but few people know how much they are paying in fees just to have a retirement account. The fees may seem like an insignificant amount, usually ranging from 0.5% to 2%, but they can actually cause major changes in your final retirement total over a period of time. When you crunch the numbers, you may discover you’re losing out on tens of thousands, if not hundreds of thousands, of dollars by the time you want to retire. In some cases, this may cause you to work several years longer than you planned just to make up the difference. Below are a few common fees you could be paying with your 401K account and what each means.

  1. Investment fees. These fees contribute to the management of the investment. With a mutual fund, the broker needs payment for services, and the fees may even be used to cover marketing and distribution costs. Mutual funds can also include a front end load or back end load that is basically a commission to the broker for the purchase or sale of shares.

Instead of a one-time fee on the front end or back end of your investment, there is another avenue for collecting commission, and it’s through a 12b-1 fee. This fee takes a percentage of the plan’s assets annually, typically ranging from 0.25% to 1%.

    1. Administrative fees. These fees pay for mailed statements, website upkeep, and even education materials for the customer including financial advisors. Some employers will pay this fee, but sometimes the cost is spread out amongst the plan holders. Those with the most shares will pay a bit more than those with few shares. Some businesses are so small that fund companies see little value in offering them retirement plan options because the cost of managing the plan wouldn’t be worth the little returns. There are middle men, however, who bundle small companies together and present them as one group to the fund companies. In this case, you may also be paying for that “wrap fee” of bundling those plans together.
    1. Individual service fees. As the name implies, these fees are based on the activity of your personal plan. You may need to take a loan, or hardship withdrawal, from your plan during difficult financial times, or you may want to make a full withdrawal after leaving employment. These cases will often result in a flat fee depending on your specific plan. There may also be quarterly fees and a set-up fee associated with your individual plan that you should always ask about before signing up.
  1. Self-Directed brokerage fees. Sometimes companies will allow an employee to choose a plan outside of the ones they are offering, but you may face a self-directed brokerage fee in that case. Sometimes these fees can be higher than the fees associated with in-plan options, so research them before considering this option if it’s available to you.

While some fees are unavoidable, there are low fee plans out there to be aware of. While there are several factors to consider when choosing a 401K plan, fees shouldn’t be an overlooked one, especially if they will cost you big time in the end.