If you’re like many Americans, your 401(k) is your single largest retirement asset. The 401(k) is a useful way for many workers to save, mainly because of its tax deferral and potential matching contributions from employers. If you take advantage of your 401(k) plan, the balance can rise quickly.
Through much of your working life, you have probably viewed your 401(k) as an accumulation vehicle. After you retire, though, it transitions into a distribution tool. You will likely need to take some form of retirement income from your savings, including your 401(k) funds. You also may need to keep growing your balance to combat inflation and to support a long life span.
Do you have a strategy in place to take distributions from your 401(k) in retirement?
It’s an important decision, as your distribution choices could impact the longevity of your funds. If you don’t know what you will do with your 401(k) after you retire, now may be the time to consider the idea. Below are a few common options:
Cash it out.
Technically, you have the ability to take your 401(k) balance as a lump sum as soon as you separate from service. It may be tempting to do so. When you take a lump-sum distribution, you’re issued a check for the balance and you’re free to do what you wish with those funds.
However, there’s good reason not to take this route. All distributions from your 401(k) plan are taxable. If your balance is significant, that could lead to a big tax bill. It may even push you into a much higher tax bracket for that year. If you’re not yet age 59½, you also may face a 10 percent penalty for early distributions.
Also, if you cash out your plan, you’ll lose out on any possible future tax-deferred growth. Remember, your retirement could last decades. You’ll need growth to make your money last. Tax deferral could help your funds grow at a faster rate.
Keep it in the plan.
Technically, you don’t have to do anything with your plan. You may be able to leave your funds in the plan as long as you’d like. If you’re familiar with the plan’s investment options and operational procedures, this may seem like an appealing option.
Of course, there are also reasons why this may not be a wise idea. One is that you are limited to only the plan’s investment options. Those options may have been fine while you were in your accumulation phase. Now that you need distributions, however, the available options may not be appropriate for you.
Also, by keeping your funds in the 401(k), that’s just one more plan that you have to monitor and maintain. That may not be a problem today, but consider the future, when you may not have the energy or cognitive ability to manage multiple accounts. Also, think about your beneficiaries and whether they will have the information they need to track down your 401(k) after you pass away.
Roll it into an IRA.
Finally, you can always roll your funds into an IRA. There are a few reasons for doing this. One is that it allows you to get the funds out of the 401(k) without facing taxes or an early distribution penalty. And the IRA will have tax-deferred growth for your future earnings.
Also, the IRA may have a wider range of investment options that are more suitable for your new goals. You may even consider tools such as annuities, which can offer downside protection and even guaranteed* lifetime income streams. Those options generally aren’t available in 401(k) plans.
Ready to develop your post-retirement 401(k) strategy? Let’s talk about it. Contact us at J. Harris Financial. We can help you analyze your needs and develop a plan. Let’s connect today.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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