In retirement

What to do with your 401(k) after retirement?

After retirement, managing your 401k becomes crucial to help ensure financial stability. This article provides insights and practical tips to help retirees make informed decisions about their 401k. Learn how to navigate the ever-evolving landscape and achieve sustainable growth.

Key takeaways

  • 01

    Evaluate your 401(k) options

    When you retire, you can leave your 401(k) in the current plan, roll it over into an IRA or take a lump sum. Each option has benefits and drawbacks, so evaluate your financial situation and goals. Consider fees, investment options and liquidity needs to make an informed choice.

  • 02

    Understand 401(k) tax implications

    Managing your 401(k) after retirement requires understanding tax implications. Taking a lump sum distribution could result in a significant tax bill, while rolling over into an IRA might offer better tax treatment. Consult a financial advisor to minimize your tax burden and develop a strategy.

  • 03

    Plan for distribution requirements

    At age 73, you must start taking minimum distributions from your 401(k) and other retirement accounts per IRS rules. Failing to do so can result in penalties. Work with a financial advisor to create a withdrawal strategy that aligns with your goals.

401(k) choices

Deciding your 401(k) future

You’ve worked hard to save for retirement and now you’re ready to take the next step. After years of working, you still have the opportunity to keep your retirement savings with your employer, even after you’ve left. There are arguments to be made to stay, just as there are reasons to roll over your money into an individual retirement account (IRA). Before deciding “should I stay or should I go” from your workplace retirement plan consider the following to help make an informed choice.

Understand the fees and features

Fees are an important part of the equation for most investors, but access to special services or investments may also be on your priority list. Your workplace savings plan may benefit from special pricing available to larger groups of individuals, so you may end up with higher fees if you leave your plan. At the same time, some investors favor specialized services and a breadth of investment options that are more likely to be available outside of their plan. Review the annual and one-time charges in writing so you can compare the fees for the 401(k) or other workplace plan and IRA side by side.

Know the standards of conduct applicable to your account

The vast majority of workplace savings plan sponsors have a fiduciary responsibility to select and monitor investments with your best interests in mind.1 Knowing that professionals keep an eye on fees, performance and suitability can be a valuable benefit. While the personalized, holistic attention of an investment advisor managing your IRA may also be an attractive option, many financial advisors follow a less strict standard in the advice they provide. In some circumstances they may suggest products to you based on the commissions they earn. Be sure to ask any advisor you may be considering how they work to protect your interests.

Consider any retirement income features

Some workplace retirement plans are designed to help meet your needs even after you retire. It’s important to find out what your plan will do for you, including offering flexible distribution options or retirement calculators to help you understand how much you can spend each month. Alternatively, some IRA accounts may give you greater control over when and how you withdraw retirement funds — and may offer retirement distribution products and services beyond what’s available in your employer plan.

There are also regulations regarding when you can make withdrawals from different account types. For example, if you are over age 55 and no longer working, you can take withdrawals from your 401(k) without being subject to a 10% penalty. In an IRA account, you must wait until you are 59½.2

Think about consolidating to keep an eye on your savings

Unless you want to keep access to specific investments or services, consolidating retirement plans can make it easier to manage your investments instead of maintaining multiple accounts. You may have the option to consolidate any previous retirement accounts with your current company, which could help you better monitor and adjust your investments based on your objectives.

Wrap up

Frequently asked questions

  • When you retire, you can leave your 401(k) in the current plan, roll it over into an IRA or take a lump sum distribution. Each option has benefits and drawbacks, so evaluate your financial situation and goals. Consider fees, investment options and liquidity needs. Understanding tax implications is crucial, and consulting a financial advisor can help you minimize your tax burden and comply with IRS rules, such as required minimum distributions (RMDs) starting at age 73.

  • When it comes to withdrawing money from your 401(k) after retirement, there are several strategies to consider. One common approach is to take required minimum distributions (RMDs) starting at age 73, which helps you avoid penalties and ensures a steady income stream. Another option is to roll over your 401(k) into an IRA, offering more flexibility and potentially better investment choices. Additionally, you can opt for systematic withdrawals, such as the 4% rule, where you withdraw 4% of your retirement savings in the first year and adjust for inflation in subsequent years. It's crucial to understand the tax implications of each method and consult with a financial advisor to develop a strategy that aligns with your retirement goals and minimizes your tax burden.

  • When you withdraw money from your 401(k) after retirement, the amount is taxed as ordinary income, meaning it will be added to your taxable income for the year. If you have a Roth 401(k), withdrawals are generally tax-free if the account has been open for at least five years and you are over 59½.

    Taking a lump sum distribution could push you into a higher tax bracket, resulting in a larger tax bill. Withdrawals before age 59½ may incur a 10% early withdrawal penalty unless you qualify for exceptions.

    To minimize your tax burden, consult a financial advisor to develop a strategy that aligns with your goals and complies with IRS rules, such as required minimum distributions (RMDs) starting at age 73.

  • For a traditional 401(k), you can start taking penalty-free withdrawals at age 59½. However, these withdrawals are still subject to ordinary income tax. On the other hand, if you have a Roth 401(k), your withdrawals can be tax-free if the account has been open for at least five years and you are over the age of 59½. This allows you to access your retirement savings without incurring additional taxes, provided you meet these conditions.

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