Understand Why & How to Roll Over Your 401(k) to an IRA

If you have worked at a company or a university for at least a year, in most likelihood, you have set up a 401(k) plan. The 401(k) plan is an essential part of savings. As a military veteran or serving personnel, you may not have put a lot of thought into this savings plan. However, with proper planning, you can increase your savings for your retirement and discretionary expenses by rolling your 401(k) plan into an IRA.

The Standard Retirement Investment Tool: 401(k) Plan

For a long time, the 401(k) plan has been a standard retirement investment tool for American citizens with over 750,000 plans available. Today there are both corporate 401(k) plans and Solo or Individual 401(k) plans for proprietorships or small business owners. Military personnel have access to a special TSP account that acts like the 401(k) plan in the private sector.

In simple terms, a 401(k) plan, a type of ‘defined contribution plan,’ is a retirement savings plan that is sponsored usually by an employer and lets you save a part of your paycheck before taxes are taken out. Taxes are not paid until the money is withdrawn from your account, typically only at retirement.

By withdrawing money from your paycheck prior to taxes, you also lower your taxable income and thus lower your taxes as a whole.

Advantages: Pre-tax income, ability to stockpile a large amount of earnings at one time with an annual contribution limit of $18,000 and catch-up contributions for people over the age of 50 of up to $6,000 additional.

Disadvantages: 401(k) plans are limited to traditional mutual funds and do not include any stocks. You thus cannot benefit from any significant stock growth.

Our Recommendations:

At VFF, we assist our clients in maximizing their retirement income and developing financial retirement plans that help you lead the life you envisioned with sufficient income.

We work with clients to rollover their 401(k) plans into traditional IRAs. No tax is incurred but the client benefits immediately from stock growth. Clients can then roll over this income into a Roth IRA if desired, and we recommend spreading this out the associated tax fee to convert from a traditional to Roth IRA over 5 years.

Example Scenario:

Say for example, you are aged 50 and have saved over $500,000 in your 401(k) plan sponsored by your employer. Every year you are able to put away more pre-tax money ($18,000) than you could do if you put it aside in a Roth or traditional IRA immediately ($5,500 limit annual). Over the years, you have built a solid nest egg. However, your savings are all in mutual funds and earning a low rate of return.

After you have maximized the benefit of stockpiling your 401(k) plan, you can then roll it over to a traditional IRA and then maximize your return in the stock market! This offers a great investment opportunity with pre-tax income.

 Call us to learn more and start saving