When you leave your current employer, you can withdraw your 401(k) funds in a lump sum. To do this, simply instruct your 401(k) plan administrator to cut you a check.
Then you're free to do whatever you please with those funds. You can use them to meet expenses, put them toward a large purchase or invest them elsewhere.
While cashing out is certainly tempting, it's almost never a good idea. Taking a lump sum distribution from your 401(k) can significantly reduce your retirement savings, and is generally not advisable unless you urgently need money and have no other alternatives.
Not only will you miss out on the continued tax-deferred growth of your 401(k) funds, but you'll also face an immediate tax bite.
First, you'll have to pay federal (and possibly state) income tax on the money you withdraw. If the amount is large enough, you could even be pushed into a higher tax bracket for the year.
If you're under age 59½, you'll generally have to pay a 10 percent premature distribution penalty tax in addition to regular income tax, unless you qualify for an exception.
For instance, you're generally exempt from this penalty if you're 55 or older when you leave your job.
And, because your employer is also required to withhold 20 percent of your distribution for federal taxes, the amount of cash you get may be significantly less than you expect.
Because lump-sum distributions from 401(k) plans involve complex tax issues, especially for individuals born before 1936, consult a tax professional for more information.
Friday, December 18, 2009
How to Take money from 401k plan.
Sunday, December 13, 2009
What makes an individual 401(k) plan attractive?
What makes an individual 401(k) plan attractive?
One feature that makes an individual 401k plan an attractive retirement savings vehicle is that in most cases your allowable 401k contributions to an individual 401k plan will be as large or larger than you could make under another type of retirement plan.
With an individual 401k plan you can elect to defer up to $15,500 of your compensation to the plan for 2008 ($20,500 if you are age 50 or older by the end of the calendar year), just as you could with any 401(k) plan.
In addition, as with a traditional profit-sharing plan, your business can make a maximum tax-deductible contribution to the plan of up to 25 percent of your compensation.
Because the amount of compensation deferred as part of a 401(k) plan does not count toward the 25 percent limit, you, as an owner-employee, can defer the maximum amount of compensation under the 401(k) plan, and still contribute up to 25 percent of total compensation to the profit-sharing plan on your own behalf.
Total plan 401k contributions for 2008 cannot, however, exceed the lesser of $46,000 or 100 percent of your compensation (plus any catch-up 401k contributions if you're 50 or older).
These 401k contributions possibilities aren't unique to individual 401(k) plans; any business establishing a regular 401(k) plan and a profit-sharing plan could make similar contributions. But individual 401k plan are simpler to administer than other types of retirement plans.
Since they cover only a self-employed individual or business owner and his or her spouse.
Individual 401k plan are not subject to the often burdensome and complicated administrative rules and discrimination testing that are generally required for regular 401(k) and profit-sharing plans.
Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act), 401k contributions had to be counted toward the business's maximum profit-sharing contribution (which was itself limited to 15 percent).
Tuesday, December 1, 2009
Factors influencing the optimal replacement rates for retirement.
The survey finds that 75% are median optimal coverage for married couples - apparently confirmed by gold standard rules often used in budget planning retirement.
However, the study says, as is often the case, the average errors represent the wide variation in optimum replacement rates for households in different situations.
Replacement rates for a married couple has to be larger than a single person otherwise identical, both because of the few higher health care costs in retirement, and because of the increased life expectancy of at least a partner.
While the study found that the median optimal rate for married couples to 75%, the average individual 401k optimum rate was 55%.
Replacement rates for low-income individual 401k and families would be higher than the rates for high-income individuals and families, due to a reduction on savings and taxes in retirement will be lower for low income individual 401k and families.
High income need less coverage than low-income households due to the significant reduction in the average effective tax rates. Of course, the opposite applies the point: if you expect future taxes to increase replacement rates optimal destination for high-income households should reflect these expectations.
A household with many children have a lower penetration of a home without children, because a couple with children when pensioners will be much lower costs of raising children than they did at work. Other factors affecting retirement optimum coverage.