What happens to your 401k after you retire?

Your 401k Plan After You Retire

by Gary Foreman


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    Your 401k Plan After You Retire

    The leading edge of the baby boomers are reaching retirement age. According to AARP, approximately 8,000 boomers turn 65 every day.

    Among the questions they'll be asking is what happens to my 401k when I retire? And with over 51 million workers having $3.5 billion in 401k accounts (Investment Company Institute), let's see if we can't shed some light on how distributions are handled in your retirement years.

    When you reach retirement, you'll have five basic options for your 401k.

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    Leave Your Money in the Plan

    Your plan may allow you to remain after you retire. Check with the plan administrator prior to your retirement. There may be special privileges or rules that you'll need to observe. You can find contact information on your plan administrator through your HR department or on you most recent 401k statement.

    Staying in the plan allows you to maintain existing investment strategies. But, as was the case while you were working, most 401k plans have limited investment options. By staying in the plan you limit yourself to those options.

    Related: What Does Retirement Look Like to You?

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    Roll the Money into an IRA

    Rolling cash and/or investments into a self-directed IRA account provides you with the greatest number of options. Most IRAs will allow you to invest in a variety of stocks, bond and mutual funds. Most investors prefer to have more options. They're also happy with the online tracking tools that most IRAs now offer. You will need to check costs before you roll into an IRA. Some do have high costs, especially if you're investing in metals or real estate.

    Also note that if you're in debt rolling a 401k into an IRA might be a bad choice. In some states creditors can attach your IRA, but not your 401k.

    Related: Video: Our Failing Retirement System

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    Take a Lump-Sum Distribution

    You can choose to take all of the money as a cash distribution with a check made out to you. Once you have the money, you can invest it or spend it as you choose. You will take a tax hit since all that income will be added to your current year's taxable income. It's wise to check with an accountant to see how much of your money will be going to Uncle Sam.

    Remember, too, that earning on money outside your 401k will be taxed each year. That makes it harder for your money to grow.

    Related: Savings After Retirement

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    Take Scheduled Distributions

    Depending on your plan administrators, you may be able to take regular scheduled distributions. Typically you choose a dollar amount that's sent to you monthly, quarterly, or annually. A major advantage is that you have a regular predictable source of income. And, since you're taking a relatively small amount out each year, your taxable income stays low, which keeps you in a lower tax bracket.

    Related: Finding Senior Discounts

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    Use Proceeds to Buy an Annuity

    You may be able to buy an annuity with some or all of the money in your 401k. An annuity provides a regular stream of income for a set number of years or for your lifetime. Some will even pay for a surviving spouse's lifetime, too. In most cases, the annuity is invested for you, which relieves you of the responsibility of choosing investment strategies.

    Related: Longevity Annuities a Good Retirement Tool?

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    Choose Carefully

    For most retirees, their 401k account is a major portion of their assets. Assets that will need to provide income for the balance of their lives. So take your time. Get good advice and choose carefully. Don't let an overly quick decision now override a lifetime of savings.

    Related Articles:
    401k Retirement Distributions
    Baby Boomers and Retirement
    Who Gets My Annuity if I Die Too Soon?


Take the Next Step:

  • Use this tool to maximize your retirement by determining the best age to take your Social Security benefits. Don't leave thousands on the table by taking Social Security at the wrong time.
  • Determine if debt could derail your retirement and what you can do about it now. Our checklist can help you. Afterall, one of the most important ingredients for a comfortable retirement is to be debt free when you retire.
  • Know how to make the most of your 401K plans during retirement.
  • Didn't save enough for retirement? You still have some options to avoiding poverty when you retire if you act now.
  • Subscribe to After 50 Finances. You've learned how to work smarter, not harder. This weekly newsletter is dedicated to people just like you. Subscribers get a FREE copy of our After 50 Finances Pre-Retirement Checklist, a list of everything you need to do to be ready for retirement.

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