I retired - What are my options with my 401k? | Stewardship Concepts Financial Advisors

A significant decision new retirees must make is what to do with the money in their company-sponsored 401(k) plan. You can generally maintain your 401(k) with your former employer or roll it into an individual retirement account(IRA). Here's how to decide what to do with your 401(k) when you retire:

Key options for your 401k:

Leave it with your former employer: This might be ideal if your plan has low fees and sound investment choices.

Roll it over to an IRA: This offers more investment flexibility and potentially lower fees, but consider potential tax implications.

Take withdrawals: This provides immediate access to your funds, but remember tax penalties and potential impact on future income.

Factors to consider when making your decision:

Age: At 59 ½, penalty-free withdrawals are possible. The age 55 rule lets you access funds early under certain conditions. You will owe income tax on each distribution from a traditional 401(k).

Required minimum distributions (RMDs) begin at 72 (unless still working). If you are 73 or older, you must take the required minimum distributions from your 401(k) account each year. But you don't have to take RMDs if you stay on the job past age 72 and don't own 5% or more of the company.

Roth conversions are crucial when deciding what to do with your 401(k). When someone retires, typically, they are in a lower tax bracket. You can pay the tax and move an unlimited amount of your 401(k) into a Roth IRA. That money will grow tax-free, reduce your RMD amount, and pass it on to your heirs tax-free. Roth conversions can save people millions over their lifetime. But check with a financial advisor near you or your CPA for the right tax strategy so you only pay what you should.

QCDs are essential to deciding what to do with your 401(k). Currently, at age 70.5, you can start giving directly from your 401(k) or IRA to charity up to $100,000 a year, which is not taxable. That means you can avoid taxes altogether. If you are charitably inclined, this is a considerable tax savings and could affect your Roth conversion strategy.

The 55 rule. If you leave your job at age 55 or older, you can start penalty-free withdrawals early. However, if you roll the funds to an IRA, you must wait until 59 1/2 to avoid the 10% early withdrawal penalty.

Cost is important. Compare fees in your 401k plan to potential IRAs.Consider cost-effectiveness and available investment options. Look at the administrative and investment costs associated with your 401(k) plan. Look up the 401(k) plan fees on your annual 401(k) fee disclosure statement. You can move your money into lower-cost funds within the plan. You can also compare the fees and investment costs in your 401(k) plan to potential IRAs. If your 401(k) plan has high fees, you could find a more reasonably priced IRA.

Investment choices: Evaluate if your 401k options meet your needs. IRAs generally offer more comprehensive investment flexibility. Most 401(k) plans have a limited investment selection. You can only switch if you are happy with the provided investments. However, educate yourself on the investment options available within the plan and an IRA.

Financial situation: Leaving funds in a 401k might offer creditor protection compared to an IRA if you have financial trouble and may have to file for bankruptcy.

Consider leaving the money in your 401(k) plan. If you enjoy the service, cost, and the 55 rule option, leaving your money with your 401(k) plan may make sense. The larger the company, the more poor your service can be when you need to withdraw your funds.

Consider rolling over to an IRA. Managing and tracking your retirement investments can be difficult when you have multiple IRAs and 401(k) accounts. Consolidating your retirement accounts by rolling your savings into a single IRA can simplify your financial life and estate for your heirs. If you plan to take on another job in retirement, you could also move your money into your new employer plan. IRAs provide a more comprehensive selection of investments than 401(k) plans, and you can shop around for accounts with low fees. A direct rollover from a 401(k) to an IRA is a penalty-free and tax-free transaction, and you can choose an IRA with the investments you want at a reasonable price.

Additional tips:

Consult a financial advisor: They can provide personalized guidance based on your circumstances.

Plan your withdrawals: Strategize to minimize tax impact and ensure your income meets your needs.

Consider delaying Social Security: This can increase your monthly benefit for a higher lifetime and guarantee a higher spousal benefit income. Social security is some of the best retirement income you can get because benefits are indexed for inflation. But if you have drained your investment accounts and value passing on wealth to the next generation, it may make sense to use the government money and let your 401(k) grow because your heirs don't get any of your social security benefits, but they will inherit your 401(k)

Assess your income strategies. Consider where your monthly income will come from and how much will be from your savings. Also, you'll want your retirement income to exceed your expenses, so you'll need to estimate your retirement expenses. Distributions from traditional retirement accounts count as income. Plan when you will begin taking the distributions to lessen the tax impact. A fee-only financial planner or accountant can help you determine the best way to start drawing down your assets and provide insight into the tax impact of your decisions.

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