How To Handle Your 401 After You Retire
Workers spend decades of their careers saving up money for retirement, whether in their employer 401 plans or through other savings vehicles. Yet despite spending a lot of time and effort making sure they invest their retirement assets well, many people don’t have much insight on what to do with their 401s after they retire. Handling your 401 correctly in retirement is just as important as managing its growth during your career, and to help guide you through the choices you have, below you’ll find a list of the things you can do with your 401 account after you retire.
1. You can leave your 401 at your last employer and take distributions on demand. One choice that most workers have is to leave their 401 accounts at their final employer. You can then choose from a variety of distribution options, one of which is simply to take money out at will on request. In essence, this makes your 401 closely resemble IRAs over which you have complete control, except that rather than going to your financial institution to make withdrawals, you’ll likely have to go through your former employer’s HR department.
If you choose this route, bear in mind that 401 accounts are subject to minimum distribution requirements once you turn 70 1/2 years old. As long as you meet those requirements, though, you can generally be flexible about when and how much money you take, giving you latitude to spend when you need money.
Put Yourself In The Driver’s Seat
Finally, you have the option of rolling over your account into an IRA, which is my favorite option out of the four mentioned here.
With an IRA, you’ll have the same tax treatment as leaving your money in the 401, but with more flexibility. Specifically, in an IRA you can invest in any stock, bond, or mutual fund you want, and even if you choose to stay in funds like those in your 401, you may be able to find lower-fee options through an IRA.
It’s true that an IRA is likely to require a little more effort on your part than simply leaving the money where it is, but in my opinion, the gaining total control of how your retirement nest egg is invested is worth it.
Where Should I Put Retirement Money Now
Where should I put my retirement money?
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Common Pitfalls Of Using Your 401 After Retirement
You ultimately have three options for how to use your 401 after retirement: Receive your funds, keep them intact, or move them to a different type of retirement account. The ideal way to use your retirement plan depends on your financial situation and how you want to use your money, so consider all options carefully.
Failure to conduct a thorough review of retirement fund options can cost you hundreds or thousands of dollars. It can also cause you to face tax penalties or miss out on other potentially high-value investment opportunities.
Meeting with an independent investment advisor can provide an excellent starting point for getting the most value out of your 401. They can help you assess the pros and cons of the myriad ways to use your retirement funds. They can also produce a personalized plan to ensure you can accomplish your financial goals in retirement.
The Average 401k Balance By Age
401k plans are one of the most common investment vehicles that Americans use to save for retirement. The 401k is an employer-sponsored plan that allows you to save for retirement in a tax-sheltered way to help maximize your retirement dollars.
If your employer offers a 401k and you are not utilizing it, you may be leaving money on the table especially if your employer matches your contributions.
While the 401k is one of the best available retirement saving options for many people, only 32% of Americans are investing in one, according to the U.S. Census Bureau. That is staggering given the number of employees who have access to one: 59% of employed Americans.
Do you have enough in your 401k to retire when you want? You can find out using Personal Capitals free and secure Dashboard, which includes a Retirement Planner for testing different scenarios.
As American households face the financial fallout of the COVID-19 pandemic, many have put retirement saving on the back burner. In a recent Personal Capital survey, only about 50% of people reported currently contributing to their 401k every paycheck. Around 49% said they receive the maximum match from their employer.
So how much do people actually have saved in their 401k plans? And how does this stack up against what they could have saved if they were maxing out their 401k every year?
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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 isâit 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.
Breaking It Down: Where Do You Fit In
There are many reasons you might think this chart seems totally reasonable, or, conversely, totally unreasonable. And thats understandable. Life presents us all with different challenges. We have unexpected medical expenses, decide to go back to school, or have kids and want to pay their college tuitions. These are all perfectly valid excuses as to why you might be falling behind where this chart says you should, or could, be.
Based on this chart, you would think that most Americans should be retiring as multi-millionaires at age 65. This probably seems way off-base, and in reality, it is most people retire with very little in the way of savings and investments. The point is that this chart shows what is possible if you are disciplined and strategic about your 401k savings.
If you are on the younger end of the ages shown on the chart, you may be daunted at the prospect of contributing $8,000 per year to your 401k, not to mention $19,500. Where you live, what your first-year salary is, or what loans you may be paying can make it difficult for this contribution to seem realistic. Its crucial, however, to recognize the importance of saving as much as you can for retirement as early as you can.
So, lets determine, based on the two scenarios in the potential savings chart, whether these figures would be sufficient to support your lifestyle for the rest of your retirement.The average life expectancy for men is around 84 years old, and 86.5 years old for women.
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Leave It With Your Former Employer
If you have more than $5,000 invested in your 401, most plans allow you to leave it where it is after you separate from your employer. If it is under $1,000, the company can force out the money by issuing you a check, says Bonnie Yam, CFA, CFP, CLU, ChFC, RICP, EA, CVA, CEPA, Pension Maxima Investment Advisory Inc., White Plains, New York. If it is between $1,000 and $5,000, the company must help you set up an IRA to host the money if they are forcing you out.
If you have a substantial amount saved and like your plan portfolio, leaving your 401 with a previous employer may be a good idea. If you are likely to forget about the account or are not particularly impressed with the plans investment options or fees, consider some of your other options.
When you leave your job and you have a 401 plan which is administered by your employer, you have the default option of doing nothing and continuing to manage the money as you had been doing previously, says Steven Jon Kaplan, CEO, True Contrarian Investments LLC, Kearny, New Jersey. However, this is usually not a good idea, because these plans have very limited choices as compared with the IRA offerings available with most brokers.
Specifying a direct rollover is important. That means the money goes straight from financial institution to financial institution and doesn’t count as a taxable event.
Required Minimum Distributions Of Retirement Accounts
You cannot keep money in your retirement accounts forever. Traditional IRAs, SIMPLE IRA, SEP IRA, 403b, and 401k retirement plans require you to start taking withdrawals when you reach the age of 70½.
Traditional IRAs, including SEP and SIMPLE IRAs, require that you start to take required minimum distributions by April 1st of the calendar year after you reach the age of 70½. 401k retirement plans, profit-sharing, 403b plans, or other defined contribution plans require you start to take required minimum distributions by April 1st either when you retire or at age 70 ½, whichever is later.
Contributing to a Roth IRA while in retirement can make a lot of sense. Unlike a Traditional IRA, Roth IRAs do not have requirements for mandatory withdrawals. You can keep money in Roth IRAs until after your death if you chose to wait.
See the IRS website for examples of dates and how your birthday affects your required minimum distribution.
It seems a little counterintuitive to continue to invest for retirement while you are actually retired. But, investing in IRA contributions after retirement can help you make your money last longer in retirement. Its a great deal if you can afford it and if your familys budget supports doing it.
What about you? Do you still plan on contributing to your retirement accounts after you actually retire? I know that I do. Id love to hear your thoughts.
Past Readers Questions:
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Buying An Annuity Yourself
You can also buy an annuity directly from an insurance company. With that approach, you choose the features and expense structure that fits your needs, and you roll your 401 money into the annuity.
Annuities can be extremely complicated. Before going that route, its critical to understand why youre buying an insurance product, and you need to evaluate the pros and cons carefully. Unfortunately, sometimes insurance agents dont understand these products, and they may be motivated primarily by large commissions.
One of the most important things to know about an annuity is that youre paying for guarantees, so the cost needs to make sense. Whats more, your money may be locked up for many years, so take your time when evaluating these products.
When you buy an annuity, you have various options to choose from. You can categorize them into two basic groups:
- Immediate annuities begin paying income more or less immediately. That might be a solution for converting your savings into lifetime income that you want right now.
- Deferred annuities can hold your funds for an extended period, and you might or might not ever convert the money into a stream of payments.
Within those categories, there are several additional varieties. For example, you may see options like longevity annuities, indexed annuities, variable annuities, and more. Again, take your time until you understand exactly how the strategies workand what youre giving up in return for any benefits.
Roth Ira Conversion Ladder
Another way to access your retirement fund is through the Roth IRA conversion. You can build a Roth IRA ladder and withdraw without having to pay the 10% penalty.
Just repeat this every year until youre 59 ½.
The drawback here is you have to wait 5 years before you can take out the first chunk of money without penalty. The 5 years wait only applies to Roth IRA conversion. If you contribute to your Roth IRA outside of a conversion, then you can withdraw that contribution anytime without paying the 10% penalty.
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There’s Still Time To Give Your Savings A Good Boost Before You Retire
If you’re between 55 and 64 years old, you still have time to boost your retirement savings. Whether you plan to retire early, late, or never ever, having an adequate amount of money saved can make all the difference, both financially and psychologically. Your focus should be on building outor catching up, if necessary.
Its never too early to start saving, of course, but the last decade or so before you reach retirement age can be especially crucial. By then youll probably have a pretty good idea of when you want to retire and, even more important, still have some time to make adjustments if you need to.
If you discover that you need to put more money away, consider these six time-honored retirement savings tips.
Different 401 Retirement Options
Next, let’s look at what choices Owen will have when he retires. The decision will largely be his. The law allows for five different alternatives for a 401 account at retirement. The options include lump-sum distribution, continue the plan, roll the money into an IRA, take periodic distributions, or use the money to purchase an annuity. Owen’s particular plan will allow for some or all of them.
The fastest way for Owen to get his “big wad” of money is to take a lump-sum distribution. He’ll get the money quickly. But there are two disadvantages. First, he’ll pay ordinary income taxes on the entire amount withdrawn. Second, the money will no longer be growing tax-free.
If Owen does take a lump-sum distribution, he’ll be subject to 20% withholding. That means the IRS will take 20% of the money distributed now and apply to his tax bill next April. Owen can thank the “Unemployment Compensation Amendments Act of 1992” for that idea.
Owen could decide to leave the money in the account. It will continue to grow tax-free. That can make a big difference in how much is available to him during retirement. Many retirees choose to spend taxable accounts first saving IRAs and 401s until they need the money or are forced by law to begin distributions.
Another possibility would be to roll the 401 into an IRA. That would give Owen the largest number of investment options. He could still withdraw the money when he wants or choose to let it grow tax-free.
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Lifetime Income From Your 401 Plan
Some 401 offer a benefit in the form of lifetime income. For example, the plan might provide annual or monthly payments that last for the rest of your lifeno matter how long you live. Those payments often cover a spouses life as well.
When you choose lifetime income, you effectively use your 401 plan to buy an annuity for you. Thats not necessarily a bad thing, but there are many annuities available, and you might prefer to buy an annuity yourself. Doing so improves the chances of you getting the features that are most important to you, and you may have additional customization options. However, having your 401 provider handle everything is a way to keep things simple, so its not necessarily a bad idea.
No going back: With lifetime income annuities, you typically make an irrevocable decision. Put another way, you usually cannot change your mind. For example, you might prefer to stop the payments and take a lump sum payment of your remaining funds, but thats probably not an option. The payments last for your life , and thats it.
How Do I Roll Over My 401 To An Ira
When you leave your job for any reason, you have the option to roll over a 401 to an IRA. This involves opening an account with a broker or other financial institution and completing the paperwork with your 401 administrator to move your funds over.
Usually, any investments in your 401 will be sold. The money will then be deposited into your new account or you will receive a check that you must deposit into your IRA within 60 days to avoid early withdrawal penalties.
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Convert Old 401s To Roth Iras
Lets pretend that youve changed jobs at least once in your career, and you still have a 401 from a former employer. If you have enough cash on hand, you can convert that 401 into a Roth IRA. Since the money in that 401 wasnt taxed when you first put it into the account, youll pay taxes on that money when you convert it to a Roth IRA. Doing that rollover is not complicated. Youll have to make some phone calls and fill out some paperwork.
Why would you want to convert that old 401 into a Roth IRA? There are a couple of reasons.
Remember this: converting is an option only if you have the cash on hand to pay the taxes. If you dont have enough, try Door #3.
