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Thursday, August 27, 2020

What to Do With Your 401(K) When You Retire

What to consider when you are retiring and need to make decisions about what you should do with savings invested in your 401(k) account.

You’ve nailed the savings game at work, and your 401(k) has grown into a nice nest egg. But retirement is on the horizon, and you have not planned for what to do with it after you have left your job. Transitioning from work to retirement can be stressful for most folks, and that includes making decisions about their retirement account.

One-fourth of 401(k) savers aged 45 and up had no idea what they will do with the account when they quit working, according to a survey of 1,000 people by research and consulting firm Cerulli Associates. And another quarter were going to put it in the hands of their financial advisor. Every situation is unique. Here is what you need to know in order to make the best decision (or help your financial advisor make the best one for you).

Check on Your 401(k) Payout Policy

Company 401(k) plans vary widely in what they allow a previous employee to do. More and more employers are giving past workers the option to “pay out X dollars per month,” says Steve Vernon, author of Retirement Game-Changers and a research scholar at the Stanford Center on Longevity. Setting up regular withdrawals works well for many retirees, but some plans allow only lump-sum disbursements or partial withdrawals. If you need monthly withdrawals but your plan does not allow them, consider rolling it over into an Individual Retirement Plan (IRA). Here is a guide on how to roll over funds from a 401(k) to an IRA.

Your Options in a Nutshell

  • Accessing your 401(k) works differently after retirement depending on your age.
  • If you retire after age 59 1/2, you can take withdrawals without paying an early withdrawal penalty.
  • You can choose not to take withdrawals and let the account sit, but you will not be able to make contributions.
  • If you want to continue making contributions, you can roll the account over into an IRA.
  • Both 401(k) accounts and traditional IRAs require you to take minimum distributions beginning at age 72.

Verify Fees

Another reason you may want to consider switching to an IRA is to get lower fees. Some 401(k) plans charge a hefty amount. Ask your employer for details on both investment expense ratios and plan administration fees. Ideally, you should be paying about 0.20% or less, but not more than 1%.

IRAs are often held at a brokerage firm, with minimal (or no) administrative fees and 100’s of products to choose from. Expense ratios for publicly traded assets are available on the internet, or you could call a broker to explore fees.

Compare Your 401(k) to a Similar IRA

Don’t leave your money in an existing 401(k) if an IRA gives you better options.

  • Will an IRA give you better payout options than the 401(k)?
  • Will the IRA lower your costs?
  • Does the IRA offer superior investment choices?

Many large companies have a decent variety of investment options in the 401(k), including ones that are low cost. But it is hard to beat an IRA for payout options, low fees or sheer number and kind of investment vehicles. 

“One big reason why a lot of clients want to move their money from a 401(k) into an IRA is that the flexibility of investment options as well as distribution options kind of goes through the roof,” says Matt Ventura, a senior wealth advisor at Exencial Wealth Advisors, a fee-only planning firm in Frisco, Texas.

Another reason to choose an IRA is for consolidation. If you have old 401(k)s and other savings accounts, you can roll them into a current or new IRA for ease of management.

Income Stream

You will want to figure out how much you will spend in retirement (here is the cost breakdown of an average retirement).  Figure out how much will come from a pension (if any), how much you will get from Social Security and what more you will need to come out of retirement savings to make up the difference. 

Most brokerage firms allow you to request distributions as you need them, whether monthly, quarterly or a on a different time schedule. And in the April after you turn 72, Uncle Sam will demand that you begin taking distributions according to a formula, whether you need the money or not. This is true for regular 401(k) plans and traditional IRAs, which benefit from pre-tax contributions. However, if you have a ROTH 401(k) or ROTH IRA, taxes have already been paid and you will have no required withdrawals. 

In conclusion, the rules around 401(k)s are complex and vary from company to company. It is important for every investor to have a working knowledge of what they are and how he or she may be affected. It is recommended to get a second opinion from your tax advisor or financial professional when in doubt about the best way for you to handle retirement funds. Money management does not stop when you are no longer employed.

Tip: If your 401(k) holds between $1,000 and $5,000, your employer is required to roll the funds over into an IRA if it forces you to exit the plan.

Tip: If you retire (or lose your job) when you are 55 but not yet 59 1/2, you can avoid the 10% early withdrawal penalty for removing money from your 401(k) at the employer you just left. This does not apply to any 401(k)s still held at earlier employers, and it does not apply to an IRA.

Click below for the other articles in the August 2020 Senior Spirit


Blog posting provided by Society of Certified Senior Advisors