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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: Will Debt Derail Your Retirement?
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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: Stretching Your Dollars in 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?
