Workers spend decades of their careers saving up money
for retirement, whether in their employer 401(k) 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 401(k)s after they retire. Handling your 401(k) 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(k) account after you retire.
1. You can leave your
401(k) at your last employer and take distributions on demand.
One choice that most workers have is to leave their 401(k) 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(k) 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(k) 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.
2. You might be able
to get monthly payments from your 401(k).
Some employers have set up their 401(k) plans to offer employees the ability to
get guaranteed monthly payments for life when they retire, in essence creating
their own pension-like arrangement. By including provisions that allow your
401(k) money to go directly toward funding an annuity from a private insurance
company, you can get continued tax-favored treatment while ensuring a steady
stream of predictable monthly payments either for as long as you live or for as
long as you or your spouse is still alive. Annuities are essentially a bet on
your life expectancy; live longer than expected and you'll end up ahead, while
if you don't survive your life expectancy, you'll lose out.
Some plans offer other options, such as fixed installments
on a monthly basis. It's important to understand that these are not guaranteed
payments and are really just convenient ways to access your own money. You can
set up payments for whatever amount you like, and you'll keep getting payments
until you run out of money. Some employers will get fancier, calculating
payments based on your account balance and life expectancy and adjusting the
amount periodically to reflect your investment performance. Whichever way you
go, many people find it useful to have monthly income they can rely on from
their 401(k).
3. Taking a lump-sum
distribution.
The other distribution option you have is to take all your assets out of your
account in one fell swoop. This option actually includes two different choices
depending on what you then do with the money.
The less attractive choice is to simply take the money out
of the plan and put it into a regular account. By doing so, you'll trigger
income tax on the entire amount all at once, which in some cases can lead to
far higher tax liability than you would have had to pay otherwise. Money that's
paid to you will have amounts withheld toward federal and state income taxes,
but there's no assurance that what's withheld will be enough to cover your
actual tax bill.
The better option is to take the lump sum and roll it over
into an IRA. By doing so, you further defer paying taxes on the amount until
you withdraw it from the IRA, and you can invest that money in a wider variety
of investment choices than you had within the 401(k) account. As long as you're
mindful of fees and choose smart investments, the rollover option is one of the
most popular and often makes the most sense for those who are willing to do
their investing homework.
Knowing how to handle a 401(k) plan after you retire is a
key part of making sure your financial strategy in retirement works the way you
want. Otherwise, a lifetime of effort could end up failing to achieve the goals
you set for your retired years.
The $60K Social
Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your
retirement savings. But a handful of little-known “Social Security secrets”
could ensure a boost in your retirement income of as much as $60,000. In fact,
one MarketWatch reporter argues that if more Americans used them, the
government would have to shell out an extra $10 billion… every year! And once
you learn how to take advantage of these loopholes, you could retire
confidently with the peace of mind we're all after.
Click
here to access the full article on USA Today.