Let AI pick your perfect Self-Directed solution! Try Our AI Tool Today!

IRA Financial Blog

401(k) Options When You Retire

401(k) Options When You Retire

Have you retired recently or looking to do so soon? Do you have a 401(k) plan with your current employer? If so, you have to decide what to do with those funds. You generally have three choices: keep it in the 401(k), cash it out, or move it to an IRA. For most people, the best 401(k) option when you retire is to move the funds to an IRA. In this article, we discuss the three choices, the pros and cons of each and why you should move your money to an IRA.

Key Points
  • You generally have three options for your 401(k) funds when you retire
  • The worst thing you can do is cash out your 401(k)
  • The best thing you can do is transfer your savings to an IRA

401(k) Options When You Retire

When you contribute to a workplace retirement plan, you are saving money in a tax-advantaged plan. Traditional 401(k) plans are funded with pretax funds, meaning you get a tax deduction on anything you contribute. On the other hand, Roth 401(k)s are funded with after-tax money. There is no upfront deduction, however, all qualified distributions from the Roth are tax free!

Once you leave your job, you need to decide what to do with those 401(k) funds. This advice goes for anytime you move on from a company; not just when you retire for good. If you are switching jobs, you might have another option. Many employer plans will allow you to move money from your former employer’s plan to the new one. That is an option to consider if you are continuing your career at a new job.

As mentioned, you have three options when you retire. Here, we’ll discuss each one.

Keep Your Money in Your 401(k) Plan

Many employers will allow you to keep the money in the 401(k) plan, even after you retire. While not the best course of action, it’s not a bad idea if you have a really good plan. All 401(k) plans, and associated fees and investment options, vary from plan to plan. However, most plans aren’t the perfect solution after you retire. First off, since you no longer work there, you have a less vested interest in the company. You may not become aware of any changes to the plan immediately. Generally, the fees are a bit higher than an IRA and the investment options are limited.

Again, we cannot make a blanket statement about 401(k) plans, since they are so different. It’s up to you to decide if you are better off leaving your money there. For some, that’s not even an option. Once you leave a job, you might be forced to move your 401(k) funds as well. If you have not retired yet, you should find that out before hand. This is especially important if you really like the plan.

Cash Out Your Funds

Many people think their only option when retiring is cashing out their old 401(k) plan. This misnomer has left many Americans in dire straights. You never have to cash out the plan entirely. When you reach age 72, you do have to start taking required minimum distributions from a traditional (pretax) plan. However, they are a small percentage of your savings, and are based on the value of the plan(s) and your age.

As you may know, a 401(k) distribution is treated as taxable income during the year in which it is taken. Imagine what your tax bill would be if you cashed out a retirement plan with $500,000 in assets. Obviously, when the funds are removed from the plan, they are no longer working for you. You lose the tax advantages. Funds that remain in the plan continue to grow tax-deferred, or tax-free in the case of a Roth 401(k). That’s gone when you deplete the plan entirely.

Plus, if you retired early, before age 59 1/2, you will also get hit with a 10% early withdrawal penalty. The same is true if you are early in your career and switching jobs. Maybe you are in dire straights and need those funds ASAP. If that is the case, only withdraw what you need. You can also look into hardship distributions, as you may qualify for penalty-free withdrawals. However, in almost all cases, cashing out your plan is the worst 401(k) option when you retire.

Rollover Your Funds to an IRA

Now it’s time to address the best option for your old 401(k) funds – the IRA rollover. Moving your old 401(k) funds to an IRA makes the most sense for 99% of retirees (and even those just switching jobs).

First, you keep your savings in a tax-advantaged account. Your IRA funds will continue to grow tax-deferred while they are there. There are no taxes to pay when you directly transfer the funds from your 401(k) to an IRA. Note: there is a 20% withholding tax if you take the money first. You have 60 days to move the funds into the IRA, or it will be treated as a taxable distribution. This is an option if you need temporary use of the funds. Just make sure to get those funds into the new plan within that time-frame.

Plus, with recent changes in the law, you can continue to contribute to a traditional IRA after age 72. So, if you continue to work after you retire, you can continue to fund the plan.

Obviously, if you move the funds to an IRA, there is no huge tax hit. You may withdraw from the plan at anytime, penalty-free after age 59 1/2. You can use those funds for whatever reason you want, too. Have an unexpected expense? Want to take a dream vacation? Buy a vacation condo? Use those retirement funds you have saved throughout your lifetime. But use them wisely, you don’t want to deplete the account!

Lastly, you get to choose where you want to open up your IRA. You’re not stuck with an employer’s choice. This allows you to decide exactly you want with your plan. For many, this means just finding a provider that gives you the most bang for your buck. Lower fees, a wider menu of investment options, etc.

However, for others, you may want to look into a Self-Directed IRA. This will allow you to really expand your invest options beyond the traditional stocks, bonds and mutual funds. When you self-direct, you can invest in anything, like real estate, precious metals, private businesses and cryptocurrency (just to name a few). The choice is yours!

In Sum

The last thing you want to do when you retire is cash out your old 401(k) plan. Now you know there are 401(k) options when you retire. Moving those funds to a new (or existing) IRA is generally the right call for most. Take the time to prepare yourself for retirement. This may include figuring out health insurance, where to live and what to do with your free time. However, don’t forget about your retirement savings. Worth with a financial advisor to decide what is in your best interest!

If you decide you want to self-direct your retirement funds, fill out the form below for more information about the Self-Directed IRA!


Latest Content

Send Us a Message!