Time in the Market, not Market Timing
It is an appealing concept: invest in the stock market at the point when the market begins an uptrend, ride it until stock values peak, and then switch to cash investments or bonds just before the stock market begins to falter. This approach to investing is known as “market timing.” Unfortunately, it has one big flaw: it assumes that you will be able to pick the exact moments when you should move into and out of the stock market. The reality is that trying to time the stock market’s highs and lows is extremely difficult, if not impossible, and timing the market incorrectly could adversely affect your portfolio’s growth to a significant extent.
However, time in the market makes sense. Consistently saving for your retirement combined with the power of compounding can build up your retirement savings over time. The longer your money is invested, the greater the potential benefit from compounding.
A fully diversified portfolio invested for the long term can help manage risk in your portfolio and potentially improve your portfolio’s performance. Diversification lets you take advantage of the fact that cash, stocks and bonds typically don’t all move in the same direction at the same time. If the value of one asset class falls, the value of the others may rise or hold steady, helping to offset possible losses.
Remember, diversification does not ensure a profit or protect against loss in a declining market.
Options for Handling Retirement Plan Savings at a Former Employer
If you plan on starting a job with a new employer soon, you will have to decide what to do with any assets currently in your former employer’s retirement plan. You will have several choices. The following information may help you make a smart choice. Here are the primary options you will have:
Withdraw it. If you have saved pre-tax monies in your former employer’s retirement plan, you will have to pay income taxes and a 10% early withdrawal penalty if you are under age 59½ and wish to withdraw the balance. If you are over age 59½, you may take a withdrawal penalty-free; however, income taxes will still apply. Whatever remains after applicable taxes will then be yours to spend. This can set you back significantly when it comes to saving for retirement, however.
Leave the money where it is. If your former employer permits it, you can opt to leave the money in the plan. Choosing this option lets you avoid a current tax bill and a possible penalty and it keeps your money working for you.
Move it to a new plan. Moving your money to your new employer’s plan (if it accepts rollovers) is another option. You avoid taxes, a possible penalty and keep your money working for your retirement. The administrator of your current plan must transfer the money directly to the administrator of your new plan to maintain your money’s tax-deferred status.
Roll it over to an IRA. Moving your money to an individual retirement account (IRA) in a direct transfer avoids tax withholding and a possible penalty.
Deciding on the most appropriate way to handle a retirement plan distribution can be difficult. A financial professional can help explain your options in more detail.
The possible tax implications of a $45,000 distribution on a worker making $60,000 a year, filing as single in the 22% federal tax bracket for 2024.
$4,500 | $4,500 | Portion of the distribution used to pay 10% early withdrawal penalty | ||
|---|---|---|---|---|
$6,600 | $6,600 | Portion of the distribution used to pay 22% federal income taxes | ||
$33,900 | $33,900 | Money remaining |
