Where To Put Your 401k Money When You Retire

You Get A Tax Break For Contributing To A 401

The core of the 401s appeal is a tax break: The funds for it come from your salary, but before tax is levied. This lowers your taxable income and cuts your tax bill now. The term youll often see used is pre-tax dollars.

Say you make $8,000 a month and put $1,000 aside in your 401. Only $7,000 of your earnings will be subject to tax. Plus, while inside the account, the money grows free from taxes, which can boost your savings.

Yes, you will have to pay taxes someday. Thats why a 401 is a type of tax-deferred account, not tax-free. Well get back to that.

How To Take 401 Distributions

Depending on your companys rules, you may elect to take regular distributions in the form of an annuity, either for a fixed period or over your anticipated lifetimeor to take nonperiodic or lump-sum withdrawals.

When you take distributions from your 401, the remainder of your account balance remains invested according to your previous allocations. This means that the length of time over which payments can be taken, and the amount of each payment, depending on the performance of your investment portfolio.

Repaying Your Tsp Loan

Even though youre paying your loan back to your own account, failure to repay properly could have serious financial consequences. So you need to know how TSP loan repayment works.

You cant take a new loan after you separate from service.

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When To Roll Over Your 401 To An Ira

Rolling over your 401 to an IRA is possible only if you’re leaving your current employer or your employer is discontinuing your 401 plan. It is an alternative to:

• Leave your money invested in your existing 401
• Rollover to your new employer’s 401
• Withdrawal from your 401, which would trigger a 10% penalty if you aren’t 59 1/2 or older

A rollover or IRA) does not have tax consequences. This would not be the case if you do a rollover to a Roth IRA.

Rolling over a 401 to an IRA provides you with the opportunity to choose which brokerage you want to hold your retirement funds. It may be the right choice if:

• Your new employer doesn’t offer a 401 plan
• You cannot keep your money invested in your current workplace plan because your plan is being discontinued or your 401 administration won’t allow you to stay invested for some other reason
• Your new employer’s 401 plan charges high fees, offers limited investments, or has other drawbacks
• You’d prefer a wider choice of investment options

However, there are some downsides to consider:

• While 401 loans allow you to borrow against your retirement funds, no such option exists with an IRA.
• Transferring company stock can be complicated account, read up on an “NUA strategy” that could save you a lot of money.)

If these downsides aren’t deal breakers for you, the next step is figuring out how to roll over your 401 to an IRA.

How Long Do You Want To Plan For

Obviously you dont know exactly how long youll live, and its not a question that many people want to ponder too deeply. But to get a general idea, you should carefully consider your health and life expectancy, using data from the Social Security Administration and your family history. Also consider your tolerance for managing the risk of outliving your assets, access to other resources if you draw down your portfolio , and other factors. This online calculator can help you determine your planning horizon.

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Are There Any Reasons Not To Take A Lump Sum 401 Payment

There are a number of reasons NOT to take a lump sum payment. You could wind up with a huge tax bill, fail to make your money stretch as long as it needs to, or spend all of it in one fell swoop.

• Responsibility Once you withdraw that money, you alone become responsible for making these funds last throughout your retirement.
• Diminished Value If the interest rate rises, the overall value of your nest egg will diminish unless its parked in an account that generates higher annual returns.
• Tax Liability Also, unless your 401 is a Roth account, you will be expected to pay the full income tax on the amount . If you are under 59.5, you may also owe an additional 10% early withdrawal tax penalty.

Finding A Good Withdrawal Rate

One widely used rule of thumb on withdrawal rates for tax-deferred retirement accounts states that withdrawing slightly more than 4% annually from a balanced portfolio of large-cap equities and bonds would provide inflation-adjusted income for at least 30 years.

However, some experts contend that a higher withdrawal rate may be possible in the early, active retirement years if later withdrawals grow more slowly than inflation. Others contend that portfolios can last longer by adding asset classes and freezing the withdrawal amount during years of poor performance. By doing so, they argue, safe initial withdrawal rates above 5% might be possible.

Dont forget that these hypotheses were based on historical data about various types of investments, and past results dont guarantee future performance. There is no standard rule of thumb that works for everyoneâ your particular withdrawal rate needs to take into account many factors, including, but not limited to, your asset allocation and projected rate of return, annual income targets , and investment horizon.

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How Much Should I Have In My 401k Based On My Age

There are a few different schools of thought on how much a person should have saved in their 401k based on their age.

Every financial expert has a different opinion. When deciding what the right number is for you, I think one thing to keep in mind is that its better to have more saved than less.

Creating a potential post-retirement budget as a guideline will help you determine how much money youll spend after youre retired.

In an ideal world, you will be completely debt free by the time you retire and have minimal housing and other expenses.

Youll want to be prepare for these costs:

A persons income and expenses can make a difference when it comes to how much they should have saved at each interval age, but here are some general guidelines.

Use these guidelines in conjunction with your projected post-retirement budget to find out if you should have more or less saved by the time you retire than what is suggest ed here.

Do you have a 401k from an old employer that you need to rollover? Check out Capitalize which is free and will help take out the hassle of rolling over your 401k!

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How Do I Start A 401

If you work for a company that offers a 401 plan, contact the human resources or payroll specialist responsible for employee benefits. You’ll likely be asked to create a brokerage account through the brokerage firm your employee has selected to manage your funds. During the setup process, you’ll get to choose how much you want to invest and which types of investments you want your 401 funds invested in.

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Where Should You Keep Your Money After Retirement

Retirement is supposed to be restful, isnt it? But these days, the very idea of retiring is causing a lot of headaches. Many people are holding off on retirement much longer than they originally planned, since the turbulent stock market has meant their savings have taken a hit. So once they do actually get to the point where theyre financially secure enough to retire, retirees want to make sure that security sticks around.

If youre in the same boat, youre probably wondering what your options are. Sure, its tempting to just stick your money under the mattress where its safe and sound. Given the economic problems weve had in the last few years, who could blame you? The trouble is, squirreling cash away isnt actually that safe. There are a couple of reasons for this. First, most home insurers only cover a small amount of cash in the event of, say, a house fire . Hopefully your retirement savings add up to more than that, so youll need to find some place a lot less vulnerable to store your funds. The second reason its not a good idea is that your money doesnt grow. During the span of your retirement, the overall economy will experience inflation, meaning that any money youve put in a shoe box wont be worth as much a few years down the road. This is why its important to choose your eggs nest wisely a competitive interest rate can help counteract any loss of value your original savings experience .

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Withdrawing Money From A 401 After Retirement

Once you have retired, you will no longer contribute to the 401 plan, and the plan administrator is required to maintain the account if it has more than a $5000 balance. If the account has less than $5000, it will trigger a lump-sum distribution, and the plan administrator will mail you a check with your full 401 balance minus 20% withholding tax.

Before you can start taking distributions, you should contact the plan administrator about the specific rules of the 401 plan. The plan sponsor must get your consent before initiating the distribution of your retirement savings. In some 401 plans, the plan administrator may require the consent of your spouse before sending a distribution. You can choose to receive non-periodic or periodic distributions from the 401 plan.

For required minimum distributions, the plan administrator calculates the amount of distribution for the qualified plans in each calendar year. The 401 may provide that you either receive the entire benefits in the 401 by the required beginning date or receive periodic distributions from the required date in amounts calculated to distribute the entire benefits over your life expectancy.

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What Is A Good Rate Of Return On A 401

How you define a good rate of return depends on your investment goals. Average 401 returns typically range between 5% and 10%, depending on market conditions and risk profile. If you’re playing catch-up, you may want higher returns. If you have a long way until retirement and a low tolerance for risk, you might be comfortable with a lower return.

Choosing Health Insurance Bills Or Your 401

If you cant afford to pay your monthly bills, you cant afford to make 401 contributions. If there are unexpected expenses or loss of income, you may even need to withdraw retirement money early. If possible, focus on putting in the minimum to get your employers match, then use the additional money to pay off any high-interest debt, like credit cards.

One option, if youre struggling to afford your 401 contributions, is to choose a cheaper health insurance plan. People who overpay for health insurance are 23% more likely to forgo their employers retirement match, a TIAA Institute study found.

A health savings account can help you reduce health costs and save for retirement at the same time. You can only fund one if you have a high-deductible health plan, which often leads to higher out-of-pocket costs. You fund an HSA with pre-tax money. When you spend it on Internal Revenue Service -approved qualified medical expenses, your distributions for those are also tax-free and penalty-free.

An HSA is a good supplement to your 401 contributions because if you have unused money in the account when you turn 65, you can withdraw it without penalty for any purpose, though youll owe income taxes for distributions made for non-qualified medical expenses.

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Question: Whats The Next Best Place To Put Retirement Savings After Maxing Out My 401

Answer: First of all, nice work prioritizing your 401. Youre making the most of one of the best wealth-building tools available, especially if your employer matches your contributions.

But step back for a moment and look at how much youre paying in fees. 401s are expensive for companies to maintain and some of that cost trickles down to the investor. Maxing out a 401 has become a sort of gospel in personal finance, but throwing every last dollar at yours might not be the most cost-effective strategy.

You cant avoid fees charged by the investment funds themselves, but if your 401 administrator charges more than 2% just to manage your account, you might want to direct some savings elsewhere .

Enter: IRAs. IRAs are tax-advantaged accounts operated by banks and brokerages, rather than your employer, and come in two forms traditional and Roth. The main difference between the two is tax treatment.

Heres a quick rundown of the popular retirement accounts:

*Combined annual contribution to a Roth IRA and traditional IRA.

Options For Using Your 401 When You Retire

The options you have associated with your 401 after you retire are the same as any other 401 participant who terminates employment. In IRS terminology, this is called “separation from service,” which refers to any reason for leaving your job whether you quit, got laid off or retired.

After a 401 participant separates from service, they have several options for their 401 savings. Here are five options and IRS rules to specifically be aware of.

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Protecting Your 401 From A Stock Market Crash

Any time you put your money in the stock market or other investments, you always run the risk of losses. While you can make largely educated decisions, things dont always go to plan. Also, because youre talking about something as important as your retirement, emotional decision-making can come into play.

Despite the above, there are many strategies, simple and complex, you can use to mitigate risk. For instance, spreading your assets across multiple types of investments and areas of the market can allow you to avoid the volatility that comes with stock-picking and concentrated investment positions.

Everyone has short-term expenses that periodically arise. For example, you might need to repair your car, replace a broken household appliance or pay for a medical procedure. Long-term expenses are even more prevalent, including student loans and mortgages. However, the best thing you can do is treat your retirement savings just as important as all of your other needs. This will ensure your pool of retirement funds will continue to grow over time.

Below are some of the most influential strategies you can use to minimize losses in your portfolio, even if a stock market crash comes around. Just remember that you can never eliminate risk entirely, though.

Reasons To Roll Over Your 401 Into An Ira

And here are five reasons to roll over your 401 to an IRA, as 34 percent of 401 owners did when leaving their companies, Ameritrade said:

1. You will have more investment choices The benefit of rolling a 401 into an IRA is you have a wide array of investment choices you can pick from, says Nydick. That can be good, and that can be bad. Hopefully, you are getting some good advice.

2. You will have more withdrawal options. If you are retired and taking the money as income, a 401 can be inflexible, says Jeanne Thompson, head of thought leadership at Fidelity Investments. Depending on your company plan, a 401 might limit withdrawals to quarterly or annually. If you want an income stream and they only allow for annual deductions, you will be in a difficult situation, she says. IRAs allow a lot more flexibility, allowing you to take distributions as you need them.

Taking money from 401s in installments is cumbersome and, in many cases, not allowed, says Ken Moraif, senior advisor at Money Matters in Dallas. In an IRA, you can and very easily. If you take an income stream, you probably want to roll it into an IRA and set up monthly withdrawals that fit your budget. An IRA does give you more flexibility.

Says Nydick: When it comes to distributions, I would lean a little more to an IRA. You have more control and you have an adviser or an 800 number. Its much easier to change things around and customize.

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