By Carl Fischer

Reaching retirement is an important milestone, and part of the journey often involves managing your retirement savings. If you’ve recently changed jobs or retired, you may be faced with the decision of what to do with your old 401(k) plan. It can be daunting or exhilarating. It can be similar to the past years or an opportunity to unlock your funds, take control, and invest in a different way. This article will explore various options available to individuals with old 401(k) plans and provide insights to help you make an informed decision.

1. Evaluate Your Current 401(k) Plan

Before making any decisions, it’s crucial to assess your existing 401(k) plan. Consider the plan’s investment options, fees, and overall performance. If you’re satisfied with the plan and it meets your retirement goals, leaving your funds in the current 401(k) may be a viable option. This decision allows you to maintain the tax advantages and convenience of managing your retirement savings in one place.

2. Roll Over to Your New Employer’s 401(k) Plan

If you’ve started a new job that offers a 401(k) plan, you may have the opportunity to roll over your old 401(k) funds into the new plan. Assess the new plan’s investment options, fees, employer contributions, and other features to determine if it aligns with your retirement objectives. Rolling over funds into a new 401(k) plan can simplify your retirement savings strategy and keep your investments consolidated.

3. Consider an Individual Retirement Account (IRA)

Rolling over your old 401(k) into an Individual Retirement Account (IRA) is a popular choice that offers greater flexibility and control over your investments. IRAs provide a wider range of investment options compared to most employer-sponsored plans. A self-directed IRA provides true diversity and control, and the most asset options available, including alternatives such as real estate, notes, private placements, and precious metals to name a few. Self-directing your investments is more work but you are using your expertise and knowledge and investing in what you know and understand.  You can choose between a traditional IRA or a Roth IRA based on your tax preferences. While a traditional IRA offers tax-deferred growth, a Roth IRA allows for tax-free withdrawals during retirement.

4. Weigh the Benefits of a Roth Conversion

If you’re considering rolling over your old 401(k) into a traditional IRA, it’s worth exploring the benefits of a Roth conversion. By converting your funds to a Roth IRA, you’ll pay taxes on the converted amount upfront, but future qualified withdrawals will be tax-free. This strategy can be advantageous if you anticipate being in a higher tax bracket during retirement or if you desire tax-free income in the future.

5. Evaluate Tax Implications and Penalties

When deciding what to do with your old 401(k) plan, it’s crucial to consider potential tax implications and penalties. If you withdraw funds from the 401(k) before reaching the age of 59½, you may incur early withdrawal penalties and be subject to income taxes. However, rolling over your funds into another qualified retirement account can help you avoid these penalties and maintain the tax-advantaged status of your savings.

6. Conclusion

Navigating the complexities of retirement planning and managing your old 401(k) plan can be challenging.  You should consider personalized guidance based on your specific circumstances and analyze the pros and cons of each option, considering factors such as your age, retirement goals, risk tolerance, and tax situation.

Deciding what to do with your old 401(k) plan is an important step in securing your financial future. Evaluating your options, including leaving your funds in the existing plan, rolling over to a new employer’s plan, or transferring to an IRA, requires careful consideration. Take into account your investment preferences, fees, tax implications, and long-term retirement goals when making your decision.

Members of National REIA can save up to $784, including a free consultation with the founder, one year of VIP customer service, and the opportunity to set up a new account for only $1. Plus, there are no annual fees until your first investment. You’ll also receive one free expedited transaction processing and two complimentary outgoing wires for your real estate deals.  Please visit www.iraasset.app/nationalreia for more info.

Carl Fischer is a founder and principal of CAMA Self-Directed IRA, LLC (dba CamaPlan).  CamaPlan is a national, self-directed tax advantaged plan administrator company headquartered in Ambler, PA.

By Carl Fischer

Retirement is often seen as a time to relax and enjoy the fruits of one’s labor. However, many retirees are surprised to discover that their tax burden doesn’t necessarily decrease in their golden years. Several factors can contribute to higher taxes in retirement, including changes in Required Minimum Distributions (RMDs), the widower tax, lump sum distributions, tax code modifications, Social Security, legacy planning considerations, and the impending tax changes set to sunset in 2026. Additionally, savvy retirement planning can harness the benefits of Roth IRAs and 401(k)s to mitigate these challenges.

1. Required Minimum Distribution (RMD) Changes

One significant factor impacting retirement taxes is the RMD, which applies to certain tax-advantaged retirement accounts like Traditional IRAs and 401(k)s. RMDs dictate that retirees must withdraw a minimum amount each year once they reach a certain age, typically starting at 72. These withdrawals are taxed as ordinary income. As life expectancies increase, RMDs can potentially push retirees into higher tax brackets, leading to increased tax liability in retirement.

2.  Widower Tax

The loss of a spouse can be emotionally devastating, but it can also have financial implications. Tax laws sometimes treat widows and widowers differently, potentially resulting in higher taxes. For example, the widower tax penalty occurs when a surviving spouse loses access to certain tax deductions and credits that were available when they filed jointly. This change in filing status can lead to a higher tax bill.

3.  Lump Sum Distributions

Some retirees may receive lump sum distributions from retirement plans or pensions. While these one-time payments can provide a significant financial boost, they can also result in a substantial tax liability if not properly managed. Lump sum distributions are typically taxed in the year they are received, potentially pushing retirees into a higher tax bracket.

4.  Tax Code Changes and the Sunset Clause

Tax laws are subject to change, and these changes can have a direct impact on retirees. Governments may decide to increase tax rates, reduce deductions, or modify credits, all of which can affect retiree’s; tax bills. It’s worth noting that some of the recent tax changes, such as those introduced by the Tax Cuts and Jobs Act of 2017, are set to sunset in 2026. This means that without further legislative action, tax rates could revert to previous levels, potentially significantly increasing the tax burden on retirees.

5.  Social Security

Many retirees rely on Social Security benefits as a significant source of income during retirement. However, depending on your overall income and filing status, a portion of your Social Security benefits may be subject to taxation. This means that even though you’ve paid into the system throughout your working years, you could still owe taxes on those benefits in retirement.

6.  Legacy Planning

Estate planning and legacy considerations also play a role in retirement taxation. Passing on assets to heirs can trigger estate taxes, depending on the size of the estate and current tax laws. Moreover, inheriting retirement accounts, like IRAs, can lead to income tax obligations for the beneficiaries. Careful estate planning is essential to minimize tax implications while ensuring a smooth transfer of assets.

7.  Harnessing Roth IRAs and 401(k)s

To mitigate the potential tax challenges in retirement, individuals can strategically utilize Roth IRAs and Roth 401(k)s. Contributions to these accounts are made with after-tax dollars, which means that withdrawals in retirement are generally tax-free. By diversifying retirement savings between traditional and Roth accounts, retirees can have more flexibility in managing their taxable income, potentially reducing their overall tax liability. Consider converting pretax dollars to Roth accounts overtime as RMDs are not required with Roth accounts increasing your control over taxes.

Conclusion

While retirement should be a time of relaxation and enjoyment, it’s crucial to recognize that taxes can remain a significant financial concern during this phase of life. Factors such as RMD changes, the widower tax, lump sum distributions, tax code modifications, Social Security, legacy planning, and the impending tax changes set to sunset in 2026 can all contribute to higher taxes in retirement. To navigate these challenges successfully, retirees should consider seeking advice from financial professionals and staying informed about tax laws and regulations that may affect their retirement plans. Additionally, leveraging Roth IRAs and 401(k)s can provide valuable tax benefits and enhance financial security in retirement.

Members of National REIA can save up to $784, including a free consultation with the founder, one year of VIP customer service, and the opportunity to set up a new account for only $1. Plus, there are no annual fees until your first investment. You’ll also receive one free expedited transaction processing and two complimentary outgoing wires for your real estate deals.  Visit https: www.iraasset.app/nationalreia for more info.

Carl Fischer is one of the founders and principals of CAMA Self-Directed IRA, LLC (dba CamaPlan).  CamaPlan is a national, self-directed tax advantaged plan administrator company headquartered in Ambler, PA.