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401K, Retirement and Debt

Retirement wasn't always a big focus for North Americans. During the past 20 years, as an example, "the government will take care of you" was an adage that many (some say too many) people took to heart. As a result, the social security system has become quite stretched. And fortunately, we now know this. As such a new focus on retiring well has permeated the American consciousness. Developing a plan, investing consistently, and staying debt free are key aspects to this new philosophy, and it's a great thing. With this comes a new focus on one of America's best long term investment instruments - the 401K.


A 401K, in case you weren't sure, is an investment plan that is offered through many employers. The tax advantages provided by the 401K are superb, a big reason why they are so popular today. Invested amounts in 401K plans are not counted as taxable income, as an example, and the earnings on the money within the plan are allowed to grow on a tax deferred basis. An additional benefit provided by some employers is the "matched employer contribution", which matches your contribution at a 1 to 1 or less level, depending on your total salary. Add these benefits up and you have a pretty sweet deal on your hands. A deal that may mean you can stay debt free throughout your retirement life. But if there is one issue with 401K plans, it's this - what happens if (or when) I want to change jobs?


What To Do When You Have To Move On

There are a number of ways to deal with your 401K plan when you decide to move on from your current employer. In fact, it is quite easy to deal with. A first option, and certainly not the best one, is to simply take the cash value of your 401K. This option comes with the most caveats, however, and if you are under 59 and a half years old, you will be subject to an automatic 10% penalty. As well, your employer can also automatically take up to 20% of the total from you as a pre-payment of federal income tax. So keep in mind that taking the cash is typically the most negative thing you can do. That money is there for your retirement, so it should stay as simply that.


Staying with your old 401K plan is also a possibility for many people, but it too has a drawback. Once you leave your employer, certainly, there will be no requirement at all for any sort of contribution matching. And another note is that if your current 401K balance is less than $5000, your previous employer has the right to remove you from the plan. So this is a choice you should make only if your new employer does not offer a 401K plan.


The Rollover

If you've watched TV lately, you've probably seen plenty of ads for the 401K rollover. There are lots of companies out there looking to get you to roll your money over into their plans. But the Rollover is typically your choice, and there are a few options you have to ensure your money is protected, and your benefits maximized. The first example is to roll over your 401K money into an IRA. With an IRA, you have better flexibility as to what you can invest in, although there are limits to total contribution. A second option might be to perform an "indirect rollover", by which you cash out all or a part of the investment and then roll some or all of the cash over to either an IRA or your new employer's 401K plan. Keep in mind that with an indirect rollover you may be subject to penalties on the money you do not rollover to a new plan.


A final, and best choice, is to roll your old plan over to your new one. With this, there is a relative ease, a lack of paperwork, and the same tax benefits you previously enjoyed.


Career Paths Do Change - A Good Thing

Today's business world dictates that you can no longer rely on a company to employ you for upwards of 20 years. Our society has quickly become a mobile one, and with that, job changes occur. But with a job change, there should be little financial risk. Using a 401K rollover is one of the best ways to ensure your retirement is good, and best of all, debt free.


Having issues with debt or have questions about retiring debt free? Contact us here for a free debt consultation. We may be able to provide debt help.

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