My Financial Toolbox: The Nuts and Bolts of Managing Your Money by Harry Sit

Author:Harry Sit [Sit, Harry]
Language: eng
Format: mobi
Publisher: Advice-Only Financial, LLC
Published: 2020-02-18T00:00:00+00:00

When you move the money to a Roth account either within the plan or out to a Roth IRA, you don’t pay tax again on the non-Roth after-tax contributions. You pay tax only on the earnings associated with the contributions. The earnings will be small if you move the money shortly after you make the contributions.

This great feature of the 401(k) or 403(b) plan enables a high contribution to a Roth account on top of the normal contributions. If your plan offers it, contribute the maximum allowed.

More and more companies are offering non-Roth after-tax contributions. Some plans are set up to do automatic In-plan Roth Rollovers. When you enable this setting, as soon as the plan sees non-Roth after-tax contributions from you, the money is rolled over to the Roth account within the plan immediately. My former employer’s plan added the non-Roth after-tax option. Had I not left, I would’ve contributed the maximum allowed.

Rollover

When you switch jobs, you have the option to leave the money in your previous employer’s plan. As long as your balance is over $5,000, the plan can’t kick you out. However, you may want to move the money to a new place, lest you forget you still have money in the old plan. This is called a rollover.

You can move the money to your new employer’s plan or you can move it to an IRA (we will talk more about IRAs in the next chapter). Either move will keep the retirement plan money in a retirement account, and you won’t have to pay taxes or penalty when you do a rollover. In general, it’s a good idea to consolidate your retirement accounts as opposed to leaving them scattered in multiple places. If your previous employer’s plan has poor investment options or it charges high fees, rolling over to a new place will also give you better investment options and lower fees.

However, if your previous employer’s plan is better than your new employer’s plan, you can also choose to leave your money in the previous employer’s plan. Make that a deliberate choice as opposed to doing nothing. Make sure to keep your contact information updated with your previous employer’s plan. You may be able to use your previous employer’s plan as the place for consolidation because some plans still accept rollovers even if you no longer work for that employer. For example, the Thrift Savings Plan (TSP) for federal government employees offers great investment options at a very low cost. Former federal government employees can keep their TSP account open, and whenever they switch jobs, they can roll over their 401(k) or 403(b) plan accounts from those other employers to the TSP.

Workplace retirement plans such as 401(k), 403(b), and TSP offer stronger protection against claims from creditors in some states. If you’re sued and you lose, the creditors can’t take your money in workplace retirement plans as easily. If litigation risk is a concern for you, lean toward leaving the money in a workplace retirement plan.

Besides, if your income is high enough, keeping the money in a 401(k) or 403(b) plan also has other benefits.

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