It is always wiser to make plans for retirement much earlier in life. The earlier it is the better it can be. Most employees in the US have a traditional 401k retirement account with their employers into which they save a particular percentage of their income monthly. There are different plans under which the employer deposits money into your account too. After many years an employee would have undoubtedly have saved a huge sum of money in his company’s retirement account. All the time the money is accumulating, it is tax free and most of the time, it cannot be withdrawn until one attains the age of 59 ½ years, at least not without penalties. The big day finally comes, you are retired. Then you can begin to think of using the money in your retirement account saved over the years.
Another scenario is that you have to change jobs. In this case, you have two options. Its either you leave all the money you have saved with your previous employer to keep growing while you create another account with your new employer, or you transfer the lump sum to a new account. If you change jobs frequently, that means you will have to manage several 401k accounts.
The question of what to do with the lump sum in your company retirement account arises. Money withdrawn from the account attracts a tax deduction by the United States IRS. Lump sum withdrawals attract a deduction of 20% in taxes. Another 10% is also deductible as state income tax. If you are leaving the money behind for your loved ones, it will also attract tax deductions that might be burdensome to them. If you are making withdrawals from your account before you attain the age of 59 ½ yrs, it attracts a penalty charge of 10%.
The question then arises. Is there any way to avoid the inevitable tax deductions applicable to your company retirement account when you make withdrawals from it? The answer is yes! You can evade the tax deductions applicable to your company retirement account by either moving the funds into an annuity for retirement account or establishing a direct rollover IRA account. You can deposit the lump sum check from your company’s retirement account into these accounts. This way, your savings will keep growing and the good part is none of it will be taxed! An annuity retirement plan professional will be of great help to you when making this move!
Some companies now offer their employees a Roth 401k retirement account instead of the traditional 401k account. The major difference is that in the 401k account, the money you save has not been taxed but will be taxed in the future when you finally make withdrawals from the account. The Roth 401k account on the other hand allows you to save a part of your income after the taxes have been deducted. That way, the money will not be taxed again when you make withdrawals at retirement.
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