401k: You’re retired. Now what?
For years, you’ve saved, invested, and planned for the day you could enjoy a long, stable, dream-filled retirement. But when it’s actually time to retire, you’ll be confronted with a basic but extremely important question:
“Now that I’m retired, what should I actually do with my retirement savings?”
The question may be basic, but the answer isn’t necessarily simple. The fact of the matter is that you have a lot of options and a lot of choices to make. If you want to make your savings last as long as you do, it’s critical that you choose the right option.
This letter is the first in a series that we’re calling, “I’m retired. Now what?” In each letter, we’ll look at some of the issues that face the newly-retired.
In this letter, we’re going to talk about a very important decision many retirees have to make:
What to do with your 401(k) once you’re retired.
For many people, a 401(k) is the easiest and most convenient way to save for retirement. According to one study, nearly 80% of full-time workers have access to an employer-sponsored retirement plan such as a 401(k), and of these, more than 80% participate in their plan.1 It’s clear your 401(k) is an invaluable tool when it comes to saving for retirement.
But look ahead to the day that you’re actually retired. What do you do with your 401(k) now? Generally speaking, you have four basic options:
- Leave the assets in your 401(k) where they are (in your old employer’s plan if plan allows).
- Withdraw the funds out of your 401(k). From there you can stick them in a savings account at your local bank, invest them in individual securities (like stocks and bonds), or even take it all to Vegas for a very fun weekend. (Note: We do not recommend this.)
- Roll over the money in your 401(k) to an IRA or Roth IRA.
- Move assets into a new employer’s plan, if plan allows. (In case you still want to work after retirement.)
Most likely you will not be using option four since you are retired, so let’s look at each of the other three options in a little more detail.
Leave the assets where they are.
Some employers will allow you to leave the money in your 401(k) where it is even after you retire. There are some obvious benefits to this. For example, you may really like the investment options in your 401(k), or you may have a lot of faith in the person or company managing your 401(k). If so, leaving the money where it is—at least temporarily—can make a lot of sense.
However, you’ll no longer be able to make contributions to your 401(k). Also, you will likely have fewer investment options than you will with an IRA. Finally, withdrawing money from your 401(k) can be tricky, as there are many rules and potential penalties to contend with.
Withdraw all the funds out of your 401(k).
You can think of this as essentially “cashing out.” This option certainly gives you the greatest control over your money. Unfortunately, there are many pitfalls to this approach. Depending on your age and tax situation, you may find your money is subject to both ordinary income taxes and early withdrawal penalties. Also, converting your 401(k) assets to cash means potentially exposing your retirement savings to emotional decisions and bad investment choices.
Roll the assets into an IRA.
This is probably the most popular option, and for good reason. Rolling your assets into an IRA allows you to continue investing your money and keep it tax-deferred. (That means you don’t have to pay taxes until you make a withdrawal.) Also, IRAs often come with a far greater selection of investment options, which is important as your needs and goals change. Finally, you can continue contributing money to your IRA account for as long as you want. Keep in mind, however, that with an IRA, you must start making withdrawals (called “minimum required distributions”) once you reach age 70½. Otherwise you will be subject to a penalty equal to 50% of the amount you were supposed to have withdrawn. This is the government’s way of ensuring you actually use your savings for retirement.
So what’s the right option for you? That’s a question we would be happy to help you answer. Everyone’s situation is different, which is why we never give blanket advice. Instead, we recommend that we take some time to sit down together to review both your current situation and future goals. That way, we can ensure you choose the best option for your individual needs.
In the meantime, remember: it’s critical that you make the right decision when it comes to the funds in your 401(k). Don’t wait until the last minute to decide. Give us a call at Minich MacGregor Wealth Management to start planning today!
1 “401(k) fast facts,” American Benefits Council, http://www.americanbenefitscouncil.org/documents2013/401k_stats.pdf
P.S. Not retired yet? Have you changed jobs and left your 401(k) behind? Many of the above options may be applicable, call us to see what makes sense for you.