Making decisions about your
retirement account can seem overwhelming, especially if you feel unsure about
your knowledge of investments. However, the following basic rules can help you
make smarter choices regardless of whether you have some investing experience
or are just getting started.
Taking Taxes Into Account When Saving & Investing isn’t always top of mind, but it should be.
In general, a rollover is the movement of funds from one retirement savings vehicle to another. You may want, or need, to make a rollover for any number of reasons — your employment situation has changed, you want to switch investments, or you've received death benefits from your spouse's retirement plan. There are two possible ways that retirement funds can be rolled over — the indirect (60-day) rollover and the direct rollover (trustee-to-trustee transfer). The indirect, or 60-day, rollover With this method, you actually receive a distribution from your retirement plan and then, to complete the rollover transaction, you make a deposit into the new retirement plan account or IRA. You can make a rollover at any age, but there are specific rules that must be followed. Most importantly, you must generally complete the rollover within 60 days of the date the funds are paid from the distributing plan. If properly completed, rollovers aren't subject to income tax. But if you fail to complete the rollover or miss the 60-day deadline, all or part of your distribution may be taxed, and subject to a 10% early distribution penalty (unless you're age 591⁄2 or anotherexception applies).
Further, if you receive a distribution from an employer retirement plan, your employer must withhold 20% of the payment for taxes. This means that if you want to roll over your entire distribution (and avoid taxes and possible penalties on the amount withheld), you'll need to come up with that extra 20% from other funds (you'll be able to recover the withheld taxes when you file your tax return).
The direct rollover, or trustee-to-trustee transfer The second type of rollover transaction occurs directly between the trustee or custodian of your old retirement plan, and the trustee or custodian of your new plan or IRA. It is often referred to as a direct rollover. You never actually receive the funds or have control of them, so a trustee-to-trustee transfer is not treated as a distribution. Trustee-to-trustee transfers avoid both the danger of missing the 60-day deadline and the 20% withholding problem. If you stand to receive a distribution from your employer's plan that's eligible for rollover, your employer must give you the option of making a direct
rollover to another employer plan or IRA. A direct rollover is generally the most efficient way to move retirement funds. Taking a distribution yourself and rolling it over may make sense only if you need to use the funds temporarily, and are certain you can roll over the full amount within 60 days.
Should you roll over money from an employer plan to an IRA?
In general, if your vested balance is more than $5,000 you can keep your money in an employer's plan at least until you reach the plan's normal retirement age (typically age 65). But if you terminate employment before then, should you keep your money in the plan (or roll it into your new employer's plan) or instead roll it over to an IRA?
There are several reasons to consider a rollover. In contrast to an employer plan, where investment options are typically limited to those selected by the employer, the universe of IRA investments is almost unlimited. Similarly, the distribution options in an IRA (especially for your beneficiary following your death) may be more flexible than the options available in your employer's plan.
On the other hand, your employer's plan may offer better creditor protection. In general, federal law protects your total IRA assets up to $1,283,025 (as ofApril 1, 2016) — plus any amount you roll over from a qualified employer plan or 403(b) plan — if you declare bankruptcy.* (The laws in your state may provide additional protection.) In contrast, assets in a qualified employer plan or 403(b) plan generally enjoy unlimited protection from creditors under federal law, regardless of whether you've declared bankruptcy.
Sequence risk, (sequence-of-returns risk) is defined as the risk of receiving lower or negative returns early in a period when withdrawals are made from an individual's underlying investments. These negative returns combined with withdrawals can seriously impact how long a retiree is able to stretch their money. It is important to understand these risks as it can help with important decisions such as when to retire, or if it is a good idea to keep working for a few years into retirement to decrease the chance of money running out before retirement has ended.
As value investors we believe in finding value in every place possible. Therefore, one of our 8-tenets, we look for funds that have a low expense ratio when compared to your peers. We believe that that a higher expense ratio does not necessarily mean higher performance, and instead reduces the return on investment. While you may assume that higher expense ratio MUST mean you’re paying for better performance, but this is actually not true. In this paper we will look at a few examples that indicate funds with high expense ratios should be avoided for cheaper alternatives, if possible.
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