What Do I Do With My 401k After I Retire

Where Do I Invest After Ive Maxed Out My 401

5 Minute Read | September 27, 2021

If youre asking how to invest beyond your workplace retirement plan, then youre making huge strides in building wealth for your future! Youre laser-focused, youve set your goals, and youre working toward themand thats a great accomplishment.

Once youve contributed the allowable amounts to your workplace investing program, you dont have to stop there. You still have options. Here are three investing vehicles to consider:

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How Do You Withdraw Money From Your 401 After Retirement

There are a few different ways that you can withdraw money from your 401 after retirement. The most common way is to take out a loan from the account. This is usually the easiest and quickest way to access your funds. Another option is to roll over the account into an IRA. This can be a good choice if you want to keep the money invested for growth. Finally, you can cash out the account entirely. This is usually not recommended, as you will be subject to taxes and penalties on the withdrawal.

How Can I Roll Over The Balance To A New Plan Or An Ira

There are two ways to move your old plans balance to a new plan or to an IRA. You can:

• ask the old plans trustee to directly transfer the balance to your new plan or an IRA, or
• request a lump-sum distribution of the balance from the old plan and then deposit it into the new plan or IRA within 60 days.

The old plan usually withholds 20% for federal income taxes from the distributed amount, so unless you make up the withheld amount when you deposit the distribution into the new plan or IRA, you:

• must include the withheld amount in your gross income in the year the distribution was made, and
• may owe an additional early distribution tax on the withheld amount.

If your distribution includes property, you can either roll over the property to the new plan or IRA or sell the property and roll over the proceeds. In either case, you must deposit into the new plan or IRA within 60 days of receiving the distribution.

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Option 2 Roll The Money Over Into An Ira

What wont change:

• Your money continues to grow tax-deferred. With the roll over, there are no tax implications if you move the money from the employer plan directly into the IRA.

Some considerations:

• Fees and expenses can vary between different providers. It will be important to do your research to make sure you understand how much you are paying for your investment advice.

A good reason to roll it over into an IRA?

• Investment Options you will have many more investment options to choose from than your employer plan

• Strategic Tax Planning When you take distributions, you can choose to withhold taxes or pay taxes when you file your taxes at the end of the year.

• If you are under age 59 ½ you can take distributions for higher education expenses or as a first time homebuyer without paying the 10% penalty.

• Simplification you may want to combine your individual retirement accounts from your past employers into one IRA that will allow you easier management of your money as you age.

Make The Best Decision For You

When it comes to deciding what to do with an old 401, there may be factors that could be unique to your situation. That means the best choice will be different for everyone. One thing to remember is that the rules among retirement plans vary so it’s important to find out the rules your former employer has as well as the rules at your new employer.

Do also compare the fees and expenses associated with the accounts you’re considering. If you find it confusing or overwhelming, speak with a financial professional to help with the decision.

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Move Your Money To Your New Employer’s Plan

If you have a new employer offering a retirement plan, you may be able to transfer your savings into it.

• Your savings stay invested with the same tax advantages
• You might be able to roll in savings from other retirement plans
• You can make ongoing contributions.
• The investment options depend on what the plan offers.
• You may be able to take out a plan loan, or withdraw money before retirement under certain circumstances

Withdrawals Taxed As Ordinary Income Not Capital Gains

When you take money out of a pre-tax retirement plan, such as a traditional IRA or most 401 plans, whatever you take out is taxable income. But thats not even the worst part.

Even if all of the profits you generate within that account are long-term capital gains, youll still have to pay taxes at your ordinary income tax rate. With investments you hold outside a retirement account, youll benefit from lower long-term capital gains tax rates on investments you hold for longer than one year in fact, depending on your income, you may not owe any capital gains taxes at all on your long-term profits.

Regardless of your income or holding period, all of your distributions from pre-tax retirement accounts get hit with regular income tax.

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Which Assets Should You Draw From First

You may have assets in accounts that are taxable , tax-deferred s, and tax-free . Given a choice, which type of account should you withdraw from first?

The answer isit depends.

• For retirees who don’t care about leaving an estate to beneficiaries, the answer is simple in theory: withdraw money from taxable accounts first, then tax-deferred accounts, and lastly, tax-free accounts. By using your tax-favored accounts last, and avoiding taxes as long as possible, you’ll keep more of your retirement dollars working for you.
• For retirees who intend to leave assets to beneficiaries, the analysis is more complicated. You need to coordinate your retirement planning with your estate plan. For example, if you have appreciated or rapidly appreciating assets, it may be more advantageous for you to withdraw from tax-deferred and tax-free accounts first. This is because these accounts will not receive a step-up in basis at your death, as many of your other assets will. A step-up in basis is used to calculate tax liabilities for your beneficiaries.

How To Withdraw Money From A 401 After Retirement

Shawn Plummer

CEO, The Annuity Expert

When you retire, one of the first things youll want to do is figure out how to access your 401 funds. This can be a little confusing, as there are several ways to go about it. This guide will walk you through the process of withdrawing money from your 401 after retirement. We will also answer some common questions, such as do you pay tax on 401 when you retire? and how do you not run out of 401 money. So read on for all the information you need to make the best decisions for your retirement!

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What To Do With Your 401 When You Retire

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You know all about saving in your 401 while youre working, but how exactly should you handle those savings when you retire?

If youre not sure, join the crowd.

A quarter of 401 participants 45 and older say they dont know what theyll do with their retirement account when they retire, according to a survey of 1,000 people with a 401 account conducted for Cerulli Associates, a research and consulting firm.

Another 25% said theyll ask their financial advisor what to do, which is another way of saying theyre not sure what to do.

The best approach depends on your situation. Following these four steps can help you get started.

Why Not Just Take It All

If you’re over 55 and are no longer working, or are over 59-1/2 regardless of your employment status, then you can withdraw your entire account balance in one lump sum. However, this is rarely a good idea, especially if you have a large amount of money in the plan. In addition to losing the creditor protection I mentioned earlier, you could incur severe tax consequences, as the money you withdraw from a 401 counts toward your taxable income.

For example, if you have a 401 account with more than $418,401 in it , a lump sum withdrawal could put you in the highest tax bracket for this year, even if you had no other income. This could take a serious and unnecessary bite out of your retirement savings.

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Consolidating 401 Account Balances: Pros And Cons

Whether its rolling into a new employers 401 or your own IRA, you have options for avoiding tax consequences from taking money out of an existing employers 401. So the question of whether to leave the money behind or take it with you really comes down to investment issues.

Moving the money into a new plan allows you to add new contributions to your previous balance. This also makes it easier to keep track of your retirement accounts.

Most importantly, having your retirement money all in one plan makes it easier to follow a consistent asset allocation strategy suited to your needs. Think of this as having all your money working toward the same goal as opposed to potentially following inconsistent investment approaches.

Even when you are retiring, remaining constructively invested through your retirement years is vital to keeping pace with inflation. Coordinating your investments in one retirement account can aid that investment effort.

The only reason for leaving a 401 balance with a previous employer for an extended period would be if you thought that employers plan was much better than the 401 plan at your new employer or an IRA you could start on your own. The investment options available and the overall cost would be factors in deciding that.

> > Best Ways to Invest Money

What To Do In Retirement Do What Makes You Happy

A lot of items on this list talk about doing something amazing. But that is not the real point. You dont have to be the best, the first, the oldest or the most.

Retirement is the time when it should not matter if you are keeping up with the Jones. Now is the time to do what makes YOU happy. You can enjoy the little things or you can swing for the fences. You can make a difference to your own loved ones or volunteer and change lives in your community. You might make a fortune doing what you love or you can make ends meet while pursuing your passion.

The scale of your endeavors should not matter.

Think hard and make sure that what you do after retirement matters to YOU.

Need some help? Many of us arent sure what one thing makes us happy. Here are a few books that might be useful.

• How to Write a Retirement Manifesto

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Withdrawing When You Retire

After you reach the age of 59 1/2, you may begin taking withdrawals from your 401. If you leave your job in the calendar year when you turn 55 or later, you can also begin taking penalty-free withdrawals from the 401 you had with that current company. If you are a public safety worker, this rule takes effect at the age of 50.

Once you reach 72, you are actually obligated to begin making required minimum distributions or RMDs.

What Is A 401 Rollover

A 401 rollover involves transferring the funds out of your current 401 account and into a new 401 plan or other retirement account. The rollover could involve transferring the money to your new employers 401 if they offer one. But thats not the only choice. The options vary depending on how much money you have in the account, the rules associated with your current 401 plan, your future financial needs, and more.

Before starting a rollover, its important for workers to explore their options. The considerations may vary depending on age, employment status and financial goals, and preferences, says Nathan Voris, director, investments, insights, and consultant services at Schwab Retirement Plan Services.

Its also important to understand as you review options, that some choices trigger tax consequences including penalties if you opt to withdraw or cash out funds prior to retirement age.

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Take Note Of 401k Fees

Taking money out of your 401 or individual retirement account before you need to potentially costs you a lot of money.

If you withdraw money from your IRA or 401 before you turn 59 12, you will probably have to pay:

• The Federal Income Tax
• Withdrawing state income taxes/funds incurs a 10% penalty.

Think It Through: Withdrawals From Your 401 Prior to Retirement

The 401 plan can be quite helpful for saving money for old age. Allows you to switch jobs without worrying about your funds being jeopardized. However, if you withdraw money from it like its a bank account in the years leading up to retirement, the plan will begin to unravel. Its better to wait until youre at least 59 12 to start withdrawing from your retirement account.

You can opens in a new windowuse this calculator to see how much other individuals your age have saved if youre debating whether or not to take withdraw.

Convert Your 401 Into An Annuity

Although this option is not widely discussed, 401 plans may offer the option to convert the savings into an annuity. This option is typically called an immediate annuity, which converts a lump sum 401 balance into an income stream of monthly payments right away. The income payout is guaranteed, but this form of income may not be appropriate for all retirees. Keep in mind that guarantees are based on the claims-paying ability of the issuer. Additionally, there could be consequences related to such a conversion, like losing access to principal in case of emergencies and potentially receiving less than the principal amount back through annuity payments due to death.

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Why Employers Offer 401s

In 1978, when the law authorizing the creation of the 401 was passed, employers commonly attracted and retained talent by offering a secure retirement through a pension . The 401 created an entirely new system, with more flexibility for both employer and employee. One of the ways it did so was by giving employers the option to match employee contributions.

Matching is a very transparent process: for every dollar you put into your 401, your employer also puts in a dollar, up to a certain amount or percentage of your income. Theres no mystery here. If your employer promises to match all 401 contributions up to 5% of your income, and you contribute that amount every month, your employer will match you dollar for dollar, every month. Its a win-win situation. You are doubling your money, and your employer is building a happy workforce.

Keeping Your Money In A 401

You are not required to take distributions from your account as soon as you retire. While you cannot continue to contribute to a 401 held by a previous employer, your plan administrator is required to maintain your plan if you have more than $5,000 invested. Anything less than $5,000 will likely trigger a lump-sum distribution.

If you do not need your savings immediately after retirement, then theres no reason not to let your savings continue to earn investment income. As long as you do not take any distributions from your 401, you are not subject to any taxation.

If your account has $1,000 to $5,000, your company is required to roll over the funds into an IRA if it forces you out of the planunless you opt to receive a lump-sum payment or roll over the funds into an IRA of your choice.

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Evaluate Your Income Strategies

If youre near retirement and you have a high income, it may be worth considering converting your 401 into an annuity. That way, you can receive regular payments from the plan rather than having to wait until you actually retire to take any money out of your account.

Before making any major decisions regarding your 401, its important to take stock of your overall financial situation and assess any risks that taking an early withdrawal penalty could have on your retirement goals. As always, be sure to speak with a trusted financial advisor or planner before making any major decisions regarding your retirement savings.

If youre losing money in your 401k and dont know why or what to do about it, make sure to visit an article I wrote here, This contains information that is essential for you to solve your problem regarding 401ks.

Guaranteed Income For Life May Not Be As Good As It Seems

One fairly popular option is to use the money to purchase an annuity, which basically means you’ll receive a steady stream of income for the rest of your life in exchange for a large payment now.

Obviously, the upside to this is that you’ll have a steady “paycheck” for as long as you live, and there is zero chance that you will outlive your money. There are several options when choosing annuities, including options that guarantee payments to your spouse or heirs if you die before a certain time. Here’s a primer on annuities to help you get started if you want more information.

The major downside to an annuity is inflation. In other words, the payments you receive from the annuity will be worth less and less as time goes on. For example, if you buy an annuity that pays you $2,000 a month and the inflation rate averages 2%, those checks will have just $1,336 in purchasing power 20 years from now. You can find annuities with payments that increase over time, but this will cut down your initial income significantly.

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