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How to Roll Over a 401K

Old Couple Sits on beach

How to Roll Over a 401(k)

Rolling over a 401(k) into a new retirement plan can make managing your retirement assets easier and, in some cases, can provide significant financial benefits to investors when they change jobs or experience another life-altering event.

Whether you want to merge an old 401(k) with a new employer’s plan, transfer your assets into a new form or retirement plan like a Roth IRA, or want to cash out your old account before retirement, there are ways to navigate this process that will benefit you and your retirement goals.

Key Takeaways

  • A 401(k) is a type of retirement account typically offered by employers that allows pre-tax and sometimes post-tax income to be invested from each paycheck.
  • The income tax owed on pre-tax funds contributed to a 401(k) is deferred until they’re withdrawn from the account, allowing them to appreciate more rapidly than traditional investments.
  • When changing employers or simply trying to consolidate your retirement accounts, it’s possible to “roll over” your 401(k) contributions to a new type of retirement plan or simply withdraw them as cash.

What is a 401(k)

A 401(k) is a popular type of retirement savings account that offers numerous benefits to investors. When an employee enrolls in a 401(k) program, it allows them to invest pre-tax, sometimes post-tax income into the account directly from their paycheck, deferring payment of income taxes on those funds until they are withdrawn once the employee nears retirement age.

Depending on the company, these contributions might also be matched up to a certain level by the employer, further incentivizing their use. As long as the funds aren’t withdrawn before the accountholder reaches age 59½, they will continue to appreciate and yield significant dividends at retirement.

How Do They Work?

A 401(k) is a highly advantageous investment tool because it allows the investor to delay paying taxes on a portion of their income. While income taxes typically must be paid on these funds once they’re withdrawn during retirement, the portion that would be paid in taxes can appreciate significantly throughout the employee’s career.

While 401(k)s are intended to be used as retirement accounts, it is possible to access the funds before retirement in the case of an emergency or other life event. Early withdrawals for these types of accounts are subject to a 10 percent penalty in addition to the standard income tax paid on a 401(k) withdrawal.

How to find an old 401(k)

When you switch jobs, your new employer may offer a 401(k) plan as part of your compensation package. In cases where an employee switches roles several times over the course of their career, it can become difficult to keep track of all of their retirement accounts.

In cases where you are unable to find a retirement account from a past employer, the federal government offers a tool to locate and recover these funds. While it is possible to track down forgotten retirement plans from past employers, it’s often easier to roll over your 401(k) to a new plan whenever you switch jobs. 

Where to Roll Over 401(k)

Rolling over a 401(k) is the process of moving your retirement funds from an existing 401(k) plan into a new account. This is typically done when switching employers, although you may have other circumstances arise that necessitate a rollover.

Depending on what you do with the funds from your 401(k) when rolling it over, you may be liable for certain tax obligations or penalties. If you are unsure of when to roll over your retirement plan or what sort of change is best for you, consult a financial advisor to determine the best strategy for your unique situation.

401(k) Rollover to IRA

An IRA, or individual retirement account, is a popular choice when deciding what type of account to roll your 401(k) over into. These plans are another form of retirement account in which pre-tax funds can be contributed and allowed to mature over time. 

One of the big benefits of rolling your 401(k) into an IRA is simplicity—multiple accounts linked to former and current employers can be consolidated into a single IRA if an investor so wishes.

IRAs are regulated differently from 401(k)s, and so these differences might be a disadvantage to certain investors.

IRAs also do not allow investors to borrow money against the accounts in the same way a 401(k) holder can, which may be a deal breaker for certain investors. 

Keep in Former Employer’s Plan

While this might be the most straightforward solution in the short term, leaving 401(k) funds in the original employer’s plan can introduce some complications down the line for certain investors.

The biggest appeal of leaving funds in the original account is simplicity—the assets will continue to appreciate over time without doing anything to them. This is also often a very flexible option for investors, as the funds can be rolled over into a new plan in the future if that proves to be advantageous.

On the downside, you can no longer contribute funds to this account once you leave the employer that manages the 401(k). This means any future contributions will have to be made to other accounts, which can become complicated over time as you move from job to job. You may also have additional tax considerations in instances where your employer includes stock in the contributions to their retirement plans.

Consolidate to the New Employer’s Plan

In some cases, it may be possible to roll over your existing 401(k) into a new company’s plan. The benefits and disadvantages of this approach are largely dependent on the terms of your current plan and the new employer’s offerings.

Before consolidating an old 401(k) into a new plan, make sure the new plan offers as good or better investment choices and administrative fees compared to the plan containing your existing assets.

Cash Out

Generally speaking, a cash distribution from their 401(k) should be a last resort for investors. While the funds contained in a 401(k) can be substantial, withdrawing these funds before age 59 ½ means paying penalties of 10 percent or more in addition to the income tax requirements for the funds. This should only be done in cases where the investor needs the cash immediately to meet an extraordinary need.

What are the rules for rolling over a 401k?

Rolling over a 401(k) can be relatively simple, as long as you follow all the applicable rules for such a conversion.

Typically, a 401(k) can only be rolled over following something known as a distributable event. This includes things like termination of employment, personal hardships, or the employee reaching the age of 59½. 

Assuming your 401(k) can be rolled over, you will also need to explore the tax implications of a rollover. Switching funds from one 401(k) to another typically does not require additional tax payments, but converting a 401(k) to a Roth IRA may require income taxes to be paid on the funds being transferred. The same goes for cash distributions from a 401(k).

Bottom Line

A 401(k) is one of the most powerful tools investors have at their disposal to prepare for retirement, and if they are managed properly, they can be a huge benefit to retirees. Knowing when, why, and how you should combine or restructure your existing retirement plans can ensure your money continues to work for you, regardless of how often you switch jobs and start new retirement accounts.

Horizon Wealth Management can support your 401k consolidation needs, along with many other options for financial planning. Schedule a consultation to get started with your financial journey.

401(k) Rollover FAQ

Why choose a 401(k) over an IRA or other retirement plan?

Many people choose a 401(k) as their primary retirement account because their employers offer some level of matching funds for their contributions. A 401(k) also typically offers a higher maximum contribution level than other accounts like IRAs.

That being said, many investors choose to employ both investment strategies as they plan for retirement. One popular strategy is to max out your employer’s matching contribution and then invest any remaining funds into an IRA, creating a stronger, more diverse retirement portfolio.

What can I roll my 401(k) into without penalty?

Generally speaking, you can transfer 401(k) funds to other 401(k) plans without paying a penalty. The same is true for transferring funds into an IRA, although certain types of IRAs will require the owner to pay income taxes on any pre-tax income being transferred from the 401(k) to the IRA.

A 10 percent penalty is assessed on funds withdrawn as cash from a 401(k) before the age of 59½. 

How much does it cost to roll over a 401(k)?

In some cases, it may not cost anything to roll over a 401(k). Certain providers will charge an administrative fee for closing out an old 401(k) or opening a new one, though, so it’s best to check with your current and prospective plan administrators to determine what fees you’re responsible for, if any.

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How to Become a Millionaire

Couple planning finances

How to Become a Millionaire

Most people hear the word millionaire and think of an unattainable, super-rich type. But building your wealth to become a millionaire is achievable through time, determination and smart financial planning. 

These steps are not get-rich-quick schemes, but long-term strategies that are generally reliable and accessible for most individuals.

Key Takeaways

  • You can become a millionaire even with an average income.
  • Start saving and investing early in life to maximize returns; compounding interest goes a long way.
  • Be smart with your earnings, don’t overspend, and stay diligent with your financial plans.

How Hard is it to Become a Millionaire

According to the 2024 UBS Global Wealth Report, the number of millionaires in the United States is over 22 million, the highest of any country. That means around 6.5% of the US population, or 1 in 15 people, are millionaires. Building your wealth to become a millionaire may seem unattainable, but with smart investing and strategic work, it can become a reality.

It takes time, but even with a modest income, becoming a millionaire may not be hard with the right long-term saving and investment strategies. The most important things are time, hard work, and smart financial choices.

Steps to Become a Millionaire

Smart investing is key to becoming a millionaire. By investing rather than just saving, you can grow your wealth without simply needing a higher income. There are several strategies you can use to achieve your wealth goals. 

Start Saving Early

The best step you can take for any financial goal is to start saving early in life. If you’re contributing to savings consistently, even in smaller amounts, it adds up significantly over time. For example, if you save $50 per bi-weekly paycheck in a high-yield savings account with an average APY of 3.5%, in 15 years you would have $23,713. 

While this shouldn’t be your only strategy for becoming a millionaire, if you are young and unsure about your financial future, having savings opens up the potential to invest when you’re ready.

Avoid Lifestyle Inflation

Lifestyle inflation commonly occurs when individuals start making more money. If becoming a millionaire is your goal, earning more money shouldn’t mean you start living large and spending the same percentage of your income. Despite how much you earn, always work to minimize your living costs. 

Instead of buying a bigger house or a newer car, consider maintaining your current lifestyle and using your income growth to save and invest in your future. Rather than spending it on a car payment, consider investing $500 a month instead. 

Start Investing Early

Many people don’t start investing until later in life, missing out on years of potential gains. Starting early allows you to take advantage of compounding interest, which means earning interest on your interest through reinvesting interest or capital gains. Investing can be intimidating. Horizons Wealth Management can help guide you with financial planning, wealth management, and managed portfolios.

With consistency and commitment to learning the best financial practices, early saving and investments can easily make you a millionaire by retirement age.

Real Estate

If you have the means, purchasing investment property can help you reach your goal of becoming a millionaire. Rental properties can generate significant passive income, help pay your bills, and allow you to put more into savings and investments. 

In real estate investment, cash flow generally increases over time as you pay your mortgage and build equity. Your returns can be passive income through rent, gains through appreciation when sold, or both. 

Invest Your Work 401 (k)

If you have a job with benefits, your employer most likely sponsors a retirement plan such as a 401(k). 401(k) deductions are taken pre-tax, and many employers match the employee’s contributions to a certain percentage, meaning your money will go much further than saving for retirement on your own. Ideally, retirement accounts will have a positive ROI, and depending on how much you invest over your career, it could easily help you reach your goal of becoming a millionaire by retirement age.

Start Your Own Company

Starting your own business is a more laborious strategy, but anything from a side hustle to making it a full-time career can set you up to earn additional income. Even if your business is small and not your main job, a small business on the side could be the extra money you need to reach your goal of becoming a millionaire. 

Bottom Line

There are many ways to become a millionaire, and many of them do not require making an extremely high salary. From saving and investing early in life and living modestly, to investing in real estate or starting your own business, you have more options than you might think. Horizons Wealth Management can assist you in assessing your situation and finding the best path to reach your goals. 

How to Become a Millionaire FAQ

What is the fastest way to become a millionaire?

Most strategies to become a millionaire take time. Investing early in your career gives you more time to take advantage of compounding interest, helping you become a millionaire faster.

What are the top 5 millionaire jobs?

Engineer, accountant (CPA), management, and attorney.

How old is the average millionaire?

61, according to the Survey of Consumer Finances conducted by the Federal Reserve.

Is it possible to become a millionaire in a year?

While it’s possible, it’s unlikely. However, becoming a millionaire is attainable when looked at as a long-term goal, and can be achieved by starting to save early in life, smart financial planning, and hard work.

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Reducing Taxable Income: Strategies to Minimize Your Tax Liability

Lowering Taxable Income

Key Takeaways

  • Maximize deductions and credits to reduce taxable income and lower your tax bill.
  • Optimize your income by leveraging tax-advantaged accounts and income-shifting strategies to minimize taxes.
  • Invest in tax-efficient investments and harvest losses to minimize taxable income and reduce your tax liability.

As the adage goes, “nothing is certain except death and taxes.” While we can’t avoid taxes altogether, there are ways to minimize our tax liability and keep more of our hard-earned money. By implementing effective strategies, individuals can reduce their taxable income and maximize their financial well-being. In this article, we’ll explore key strategies for reducing taxable income and minimizing tax liability.

Maximize Deductions and Credits

One of the most effective ways to reduce taxable income is to maximize deductions and credits. There are two types of deductions: standard deductions and itemized deductions. While the standard deduction is a fixed amount, itemized deductions allow you to claim specific expenses as deductions.

Itemize Deductions

Itemized deductions are expenses that you can deduct from your taxable income, reducing the amount of income that’s subject to tax. To itemize deductions, you’ll need to keep track of your expenses throughout the year and report them on Schedule A of your tax return. Some common itemized deductions include:

  • Mortgage interest and property taxes: If you own a home, you can deduct the interest you pay on your mortgage and your property taxes. This can be a significant deduction, especially for homeowners in areas with high property taxes.
  • Charitable donations: Donations to qualified charitable organizations are deductible as long as you keep receipts and bank statements to prove your donations.
  • Medical expenses: If you have significant medical expenses, you can deduct them from your taxable income. This includes costs such as doctor visits, prescriptions, and medical equipment.
  • State and local taxes: You can deduct state and local income taxes, as well as sales taxes, up to a maximum of $10,000.

Claim Credits

Tax credits are even more valuable than deductions because they directly reduce your tax liability rather than just reducing your taxable income. There are several types of tax credits, including:

  • Earned Income Tax Credit (EITC): The EITC is a refundable credit designed to help low- to moderate-income workers. If you’re eligible, you could receive a significant credit, even if you don’t owe taxes.
  • Child Tax Credit: If you have dependent children under the age of 17, you may be eligible for a credit of up to $2,000 per child.
  • Education credits: If you’re paying for education expenses, such as tuition and fees, you may be eligible for credits like the American Opportunity Tax Credit or the Lifetime Learning Credit.

Optimize Your Income

Another way to reduce taxable income is to optimize it. This can be done by contributing to tax-advantaged accounts and using income-shifting strategies.

Contribute to Tax-Advantaged Accounts

Tax-advantaged accounts, such as 401(k) and other retirement accounts, Health Savings Accounts (HSAs), and some 529 college savings plans, allow you to save for specific expenses while reducing your taxable income. Contributions to these accounts are made before taxes, reducing your taxable income and lowering your tax liability.

Take Advantage of Income-Shifting Strategies

Income-shifting strategies involve shifting income from one tax year to another or from one family member to another. This can be done by deferring income to a later tax year or by shifting income to a lower-earning family member. For example, if you’re self-employed, you can defer income to a later tax year by delaying invoices or payments.

Minimize Taxable Income from Investments

Investments can generate significant taxable income, but there are ways to minimize this income and reduce your tax liability.

Harvest Investment Losses

Tax-loss harvesting involves selling investments that have declined in value to offset gains from other investments. This can help reduce your tax liability by minimizing capital gains. For example, if you have an investment that has increased in value, you can sell it and use the gain to offset losses from other investments.

Utilize Business Expenses and Home Office Deductions

If you’re self-employed or have a side hustle, you may be eligible for business expense deductions and home office deductions.

Business Expenses

Business expense deductions allow you to deduct expenses related to your business from your taxable income. This can include costs such as travel expenses, equipment and supply expenses, and professional fees.

Home Office Deductions

Home office deductions allow you to deduct expenses related to your home office from your taxable income. This can include costs such as mortgage interest, utilities, and office equipment. To claim a home office deduction, you’ll need to meet certain requirements, such as using a dedicated space for your business and keeping accurate records of your expenses.

Consider Hiring a Tax Professional

Finally, consider hiring a tax professional to help you navigate the complex world of taxes. A tax professional can provide expert knowledge of tax laws and regulations, saving you time and reducing stress. They can also help you identify potential tax savings and ensure you’re taking advantage of all eligible deductions and credits.

Conclusion

Reducing taxable income is a key strategy for minimizing tax liability and maximizing financial well-being. By maximizing deductions and credits, optimizing income, minimizing taxable income from investments, utilizing business expenses and home office deductions, and considering hiring a tax professional, individuals can reduce their tax liability and keep more of their hard-earned money. Remember to stay informed about tax laws and regulations, and take action to reduce your taxable income today.

In addition to these strategies, there are several other ways to reduce taxable income, including:

  • Taking advantage of tax-deferred savings accounts: Tax-deferred savings accounts, such as 529 plans and Health Savings Accounts (HSAs), allow you to save for specific expenses while reducing your taxable income.
  • Donating to charity: Donating to charity can provide a tax deduction while also supporting a good cause.
  • Keeping accurate records: Keeping accurate records of your expenses and income can help you identify potential tax savings and ensure you’re taking advantage of all eligible deductions and credits.
  • Staying informed about tax laws and regulations: Staying informed about tax laws and regulations can help you identify potential tax savings and ensure you’re taking advantage of all eligible deductions and credits.

By implementing these strategies and staying informed about tax laws and regulations, individuals can reduce their taxable income and minimize their tax liability. Horizons Wealth Management can help you determine the right investments for your financial goals. Learn more about our portfolio management, financial planning, and wealth management services today.

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Getting A Big Tax Refund Means You’re Doing It Wrong

Getting a big tax refund feels good, but it means you essentially gave the government an interest-free loan.  If we hate paying taxes, then why do we consistently overpay them, collectively lending Uncle Sam some $300 billion year after year—interest free?

Read more here:

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