IRAs allow investors to benefit from tax-deferred growth on investments they make. You can invest your IRA funds in thousands of mutual fund offerings.
At age 55 or later (if you recently left an employer), withdrawals from your 401(k) plan are free of penalties; early withdrawals could incur an early withdrawal penalty of 10%.
Taxes
IRS penalties apply when withdrawing early from 401(k) plans, with additional taxes due upon them as well. By switching over your retirement assets into an IRA account instead, funds can be withdrawn without paying these extra taxes.
IRAs come in both traditional and Roth versions, without needing employer sponsorship. Contribution limits apply each year and there are certain rules specific to both traditional and Roth accounts that must be observed.
Your Individual Retirement Account, or IRA, can help you save for retirement or large expenses like tuition for higher education. Before making any decisions or investments, however, it would be prudent to consult a financial professional regarding tax implications of each option and choose what best fits for your circumstances – perhaps Roth IRA works better?
Withdrawals
There are a variety of methods you can use to access your retirement savings, including withdrawals. Before taking this step, however, speak to a financial advisor so they can explain all of your options, such as any possible effects they might have on your tax situation.
The IRS typically assesses an early withdrawal penalty of 10%; however, there may be exceptions which enable you to withdraw funds without incurring this fee.
An IRS hardship withdrawal is recognized as a valid reason to access your 401(k), when they determine that it meets immediate and heavy financial need. According to them, hardship withdrawals include medical expenses, tuition payments, funeral costs, loss of a spouse and expenses resulting from a federally declared disaster.
Periodic distributions allow you to receive regular distributions from your retirement savings over an indefinite timeframe or anticipated lifetime, though they must be reported as ordinary income in the year they are received.
Fees
As soon as you withdraw money from a retirement plan, it typically goes directly into either a checking or savings account. Although this might appear cost-effective at first, depending on where the money goes it may incur 20% mandatory federal withholding tax.
Rollovers offer an easy solution, enabling the funds to be invested directly in an IRA account rather than into an employer-provided 401(k) plan which may only offer limited investment opportunities such as individual stocks, bonds or exchange-traded funds.
Your IRA comes with its own set of regulations regarding withdrawals, fees, minimum distributions and taxes. A Merrill Lynch Wealth Management advisor can review your unique situation and help determine how best to allocate the money according to your goals and financial needs.
Investments
Many 401(k) plans provide limited investment choices that are arranged by their employer, such as mutual funds and exchange-traded funds; however, individual retirement accounts (IRAs) offer greater choices, particularly those looking for socially responsible investing or taking a low-risk approach with fixed income investments such as bonds and certificates of deposit.
If you withdraw money from your 401(k) before age 59 1/2, taxes and penalties could apply – you could even incur an additional 10% penalty if you’re under 59 1/2. Instead, roll it over into an IRA so as to reduce both taxes and penalties until retirement arrives.
Direct rollover is often the best method of moving funds between accounts, giving you greater control of where it will be invested. If moving money from your old employer’s 401(k), however, this must be completed within 60 days to avoid mandatory income tax withholding and may make things simpler by simply cashing out then immediately transferring it into an IRA account.
