401k Options After Retirement

If you are retired, or getting close, you may be starting to think about what to do with your 401k after retirement.  Depending on your age and the details of your plan, you have a number of things you can do with your 401k.

Take Qualified Distributions

At the age of 59-1/2 you are able to start taking qualified distributions from your 401k.  The one exception to this rule is if you are 55 or older, and have left, been laid off, or been fired from your job.  In this case you can only take money from the 401k of your current employer.  If you have money in the 401k of a former employer, it is not eligible to be removed until you are 59-1/2.

Buy an Annuity

A popular option assuming it’s available from your employers plan is to purchase an annuity.  An annuity is an insurance product that allows you to pay a lump sum of money up front in exchange regular payments over a period of time.  This essentially provides you an income stream over whatever period of time is specified in the annuity contract, and in some cases this can be for the rest of your life.

There are many options when it comes to annuities, including the ability to purchase deferred annuities if you don’t need the income immediately, but want to provide yourself security down the road.

Lump Sum Withdrawal

This is an option, but you want to put some serious thought into if this is a good idea.  Remember that often times the biggest tax benefit to your 401k is being able to pay a lower tax rate than during your working years.

If you’ve managed to save up a decent amount in your 401k, you might find that you are not only paying at least the same amount in taxes, but you could even be bumped into a higher tax bracket.

Keep The Money Invested Until 70-1/2 Years Old

If you have the financial flexibility, often it is best to just continue letting your money sit in the 401k and grow with the market.  At 70-1/2 you will be required to start taking required minimum distributions ( RMDs).  Many times people have retired by this age, and without wages coming in from a job, their tax rates will have dropped allowing you to pay a lower tax on these dollars than you would have earlier in life.

Continue Investing With an IRA

A great option for those that want to continue taking an active role in these investments, have more flexibility, and to continue investing if you are no longer with the company managing your 401k, is to rollover the money into an individual retirement account (IRA).

With an IRA you have more flexibility to invest in stocks, bonds, and mutual funds of your choosing.  Keep in mind that in order to continue investing in your IRA you will need to be earning taxable compensation.  Other income such as Social Security or investment income cannot be used towards an IRA contribution.

The Bottom Line

You have different options depending on your personal situation.  Often the best approach is to continue allowing funds to grow as long as possible.  You also want to keep a keen eye on when you are at the lowest tax bracket possible before withdrawing to maximize the tax benefit of this account.

At the end of the day you want this money to be used for financial security well into your retirement and later years of life.  One of the best moves you can make is to ensure you understand the impacts of any decision you make by consulting a trusted financial advisor.