How To Manage 401k After Retirement

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Contribute The Max For The Match

How to MAXIMIZE your Fidelity 401k | Take Charge of Your Retirement Investments

If your company is matching your contributions up to a certain point, contribute as much as you can until they stop matching the funds. Regardless of the quality of your 401 investment options, your company is giving you free money to participate in the program. Never say no to free money.

Once you reach the maximum contribution for the match, you might consider contributing to an IRA to diversify your savings and have more investment choices. Just dont miss out on the match.

Withdraw From Accounts In The Right Order

If you need retirement savings to get by and youre wondering whether to take them from an IRA, 401 or a Roth account, dont be tempted by instant gratification. Sure, a Roth IRA withdrawal will be tax-free, but you may wind up paying more in lost opportunity.

Instead, withdraw from taxable retirement accounts first and leave Roth IRAs alone for as long as possible.

Skeptical? Consider what happens if a 72-year-old person takes $18,000 out of a traditional IRA, while sitting in the 24 percent tax bracket: Theyll owe $4,320 in taxes. If they withdraw the same amount from a Roth, they wont pay a dime. But if this person doesnt have to take an RMD from a Roth IRA, and instead earns 7 percent annually on the account for another 10 years, it would grow to $35,409. Those earnings would also be tax-free when withdrawn from the Roth, whether by the person holding the account or their beneficiary.

No Rebalancing Or Other Investments Required

Because TDFs are so structured, they’re intended to be the only asset in your retirement portfolio. Combining other funds with a TDF would change your risk profile and defeat the purpose of the glide path.

With only one fund in your 401, you don’t have to rebalance or trade. Your main responsibility as a TDF shareholder is to check in on the fund’s performance versus peers periodically.

You may decide on a different approach if the fund performs poorly. Otherwise, you could leave your TDF alone indefinitely.

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Conservative 401 Portfolio Analysis

General Instructions: Once you have signed up for Personal Capital and linked your 401k, go to the Investing tab on the top right and then choose 401k Fee Analyzer. This is the page where we plan to do all the analysis to get an idea of how different assumptions make big differences.

Base Assumption: The 401k alone is not enough to provide for a comfortable retirement. A 401k needs to be coupled with Social Security and other after tax investments to give ourselves a chance for financial security. This is my new three-legged stool in retirement.

In this example, we will use an existing 401k balance of $405,000. I assume no contributions and no employer match or profit sharing forever. Portfolio growth assumption is 4% per year with 0% additional fees. 4% annual growth is conservative given the average return for the S& P500 since the 1950s until now is roughly 7%. The 2009-2010 economic downturn helped bring the average down.

Ill also share what Id do under each scenario to better manage my 401k.

Qualified Distributions Are Allowed At Age 59

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A 401 plan is an employer-sponsored retirement account that allows employees to contribute a portion of their salary before IRS tax withholding. Companies commonly match a percentage of the employee’s contribution and add it to the 401 account.

Before age 59½, an employee faces an IRS penalty if they withdraw money from a 401 account. The IRS allows penalty-free withdrawals, called qualified distributions, from retirement accounts after age 59½.

At that time, individuals are also permitted to convert their company-sponsored 401 into a more flexible individual retirement account . Withdrawals from a 401 are mandated after age 72 and are called required minimum distributions, or RMDs.

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You Must Begin Taking Distributions At Age 72

Even if you donât need the money, youâll have to start taking required minimum distributions from your 401 beginning at age 72. The same goes for any other tax-deferred retirement accounts you may have. , you can get around this by converting these funds to a Roth IRA. However, you wonât owe any taxes on the money in a Roth 401, and itâs distributed proportionately.)

The amount youâre required to withdraw depends on your retirement account balances and your life expectancy. While these IRS worksheets can help you do the math, a financial advisor can help you think about how to be effective with your distributions.

Why Employers Offer 401s

In 1978, when the law authorizing the creation of the 401 was passed, employers commonly attracted and retained talent by offering a secure retirement through a pension . The 401 created an entirely new system, with more flexibility for both employer and employee. One of the ways it did so was by giving employers the option to match employee contributions.

Matching is a very transparent process: for every dollar you put into your 401, your employer also puts in a dollar, up to a certain amount or percentage of your income. Theres no mystery here. If your employer promises to match all 401 contributions up to 5% of your income, and you contribute that amount every month, your employer will match you dollar for dollar, every month. Its a win-win situation. You are doubling your money, and your employer is building a happy workforce.

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How To Manage Your Retirement Savings

Scott Spann is an investing and retirement expert for The Balance. He is a certified financial planner with over two decades experience. Scott currently is senior director of financial education at BrightPlan. Scott is also a published author and an adjunct professor at Maryville University, where he teaches personal finance.

Approximately 71% of private industry and state and local government employees had access to a retirement plan at work in 2020. For those employees able to save for retirement in an account that grows tax-deferred until retirement, it could be one of the most valuable employee benefits available.

While many employees contribute to a 401 retirement plan through their workplace, others use a 403 or a 457 plan instead, though they work very similarly.

Here are seven essential best practices to make sure you get the most out of participation in a retirement plan at work.

Changing Employers And A 401 K

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A change of company might mean you change your 401 k too. Try to find out how long that company can hold your 401k after you leave. We encourage you to discuss this matter with your new employer. Its important that you take your old 401 k into consideration when you look for a new place of work. You may also want to choose your new employer based on the kind of retirement plan is on offer.

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Keeping Your Money In A 401

You are not required to take distributions from your account as soon as you retire. While you cannot continue to contribute to a 401 held by a previous employer, your plan administrator is required to maintain your plan if you have more than $5,000 invested. Anything less than $5,000 will likely trigger a lump-sum distribution.

If you do not need your savings immediately after retirement, then theres no reason not to let your savings continue to earn investment income. As long as you do not take any distributions from your 401, you are not subject to any taxation.

If your account has $1,000 to $5,000, your company is required to roll over the funds into an IRA if it forces you out of the planunless you opt to receive a lump-sum payment or roll over the funds into an IRA of your choice.

Can I Take All My Money Out Of My 401 When I Retire

You are free to empty your 401 as soon as you reach age 59½or 55, in some cases. Its also possible to cash out before, although doing so would normally trigger a 10% early withdrawal penalty.

If you want to cash out everything, you can opt for a lump-sum payment. Think carefully before taking this approach, though. Withdrawing your savings all at once could result in a hefty tax bill and, if not managed wisely, leave you living in severe poverty later on in retirement.

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Roll Money Into An Ira

If you are not satisfied with the 401 investment options, you can rollover the money into an IRA since the latter has more investment options and offers greater control. You can reallocate your portfolio of investments to help you grow your investments further in years to come.

If you have a string of old 401s when you retire, you should consolidate them into an IRA for better management of your retirement savings. Also, you can reduce the administration fees of your retirement money, and even qualify for discounts on sales charges.

Weigh Your Investment Options

401K Retirement Plans

401s tend to have a small investment selection thats curated by your plan provider and your employer. Youre not selecting individual stocks and bonds , but mutual funds ideally ETFs or index funds that pool your money along with that of other investors to buy small pieces of many related securities.

Stock funds are divided into categories. Your 401 will probably offer at least one fund in each of the following categories: U.S. large cap which refers to the value of the companies within U.S. small cap, international, emerging markets and, in some plans, alternatives such as natural resources or real estate. Diversify your portfolio by spreading the portion youve allocated to equities among these funds.

You want to allocate more to the biggest asset classes, like U.S. large caps and international. U.S. small cap, natural resources and real estate are not as prevalent asset classes, so youll take smaller bits of those, Walters says.

That might mean putting 50% of your equity allocation into a U.S. large cap fund, 30% into an international fund, 10% into a U.S. small cap fund and spreading the remainder among categories such as emerging markets and natural resources.

The bond selection in 401s tends to be even more narrow, but generally youll be offered a total bond market fund. If you have access to an international bond fund, you might put a bit of your savings in there to diversify globally.

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Roll Your Balance Over Into A Traditional Ira

From a tax standpoint, this would be the same as a rollover to a traditional 401 as described above.

The only difference is that you would be responsible for finding your own investment options, rather than choosing from the menu of a 401 plan.

This may be a good option if you are fully retiring and need a vehicle for managing your retirement savings in retirement.

Figuring Out Your Taxes On A Traditional 401

Distributions from a regular, or traditional, 401 are fairly simple in their tax treatment. Your contributions to the plan were paid with pre-tax dollars, meaning they were taken off the top of your gross salary, reducing your taxable earned income and, thus, the income taxes you paid at that time. Because of that deferral, taxes become due on the 401 funds once the distributions begin.

Usually, the distributions from such plans are taxed as ordinary income at the rate for your tax bracket in the year you make the withdrawal. There are, however, a few exceptions, including if you were born before 1936 and you take your distribution as a lump sum. In such a case, you may qualify for special tax treatment.

The situation is much the same for a traditional IRA, another tax-deferred retirement account thats offered by some smaller employers or may also be opened by an individual. Contributions to traditional IRAs are also made with pre-tax dollars, and so taxes are due on them when the moneys withdrawn.

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What Is A Withdrawal Buckets Strategy

With the buckets strategy, you withdraw assets from three buckets, or separate types of accounts holding your assets.

Under this strategy, the first bucket holds some percentage of your savings in cash: often three-to-five years of living expenses. The second holds mostly fixed income securities. The third bucket contains your remaining investments in equities. As you use the cash from the first bucket, you replenish it with earnings from the second and third buckets.

Potential advantages: This approach allows your savings to continue to grow over time. Through constant review of your funding, you also benefit from a sense of control over your assets.

Potential disadvantages: This approach is more time-consuming.

Cashing Out Your 401k While Still Employed

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The first thing to know about cashing out a 401k account while still employed is that you cant do it, not if you are still employed at the company that sponsors the 401k.

You can take out a loan against it, but you cant simply withdraw the money.

If you resign or get fired, you can withdraw the money in your account, but again, there are penalties for doing so that should cause you to reconsider. You will be subject to 10% early withdrawal penalty and the money will be taxed as regular income. Also, your employer must withhold 20% of the amount you cash out for tax purposes.

There are some exceptions to the rule that eliminate penalties, but they are very specific:

  • You are over 55
  • You are permanently disabled
  • The money is needed for medical expenses that exceed 10% of your adjusted gross income
  • You intend to cash out via a series of substantially equal payments over the rest of your life
  • You are a qualified military reservist called to active duty

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How To Handle Your 401 After You Retire

Workers spend decades of their careers saving up money for retirement, whether in their employer 401 plans or through other savings vehicles. Yet despite spending a lot of time and effort making sure they invest their retirement assets well, many people don’t have much insight on what to do with their 401s after they retire. Handling your 401 correctly in retirement is just as important as managing its growth during your career, and to help guide you through the choices you have, below you’ll find a list of the things you can do with your 401 account after you retire.

1. You can leave your 401 at your last employer and take distributions on demand. One choice that most workers have is to leave their 401 accounts at their final employer. You can then choose from a variety of distribution options, one of which is simply to take money out at will on request. In essence, this makes your 401 closely resemble IRAs over which you have complete control, except that rather than going to your financial institution to make withdrawals, you’ll likely have to go through your former employer’s HR department.

If you choose this route, bear in mind that 401 accounts are subject to minimum distribution requirements once you turn 70 1/2 years old. As long as you meet those requirements, though, you can generally be flexible about when and how much money you take, giving you latitude to spend when you need money.

You Can Begin Withdrawing Funds At Age 59

When you withdraw funds from your 401 before you turn 59½, youâll typically be hit with a 10 percent penalty. But once you turn 59½, that penalty is waived. At this point, you can begin taking withdrawals as you please.

However, just because you’re allowed to take distributions doesnât mean you have to right away. In fact, if you donât need income from your 401, it may be worth leaving that money alone for the time being. Not only is this important from a tax perspective , but it also means this money can keep growing in your 401.

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How To Better Manage Your 401 For Retirement

To better manage your 401k, you must first understand the reality of the financial landscape.

With the way the government loves to spend our money, I wouldnt be surprised if the retirement age for distribution without penalty increases beyond 59.5. Alternatively, the government could impose a distribution tax to take more of our money.

After all, with a massive government budget deficit due to the global pandemic, taxes will be going up to pay for all the stimulus spending. That said, we can hope for the best by reducing our mutual fund expenses and creating different scenarios to better prepare for our future.

The best way to increasing our odds for retirement success is to run various 401K investment scenarios. To do so, , the #1 free financial tool. Ive used PC since 2012 to manage my finances and analyze my 401K for excessive fees.

I will run three investment scenarios using the free 401k investment analyzer by Personal Capital.

Regardless of whether you are retired or not, I encourage everybody to perform at least these three scenarios and write down some notes.

Early retirees need to be extra diligent given we are more dependent on our investments to survive. If you have years to go before retirement, I suggest you pretend you are retired now so you can develop a fire to be all over your money!

Your Personal Financial Situation

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Consider other options that your current plan may offer as you weigh the advantages of each alternative. For example, if your plan offers annuitization options, it may be worth staying invested, particularly if a guaranteed income stream for your lifetime is an important consideration. As you consider income streams, however, dont forget to include Social Security benefits in your calculations. Waiting to claim Social Security benefits is probably the most effective way to increase your guaranteed income, says Ward. The longer you wait, until age 70, the higher your monthly benefits will be.

Keep financial flexibility and control in mind

You will need to start taking RMDs by April 1 the year after you turn 72. With an IRA, you have control over which funds you liquidate to cover any distribution you take, including RMDs. Your 401 may not give you as much flexibility. Check with your plans administrator to ensure you understand how your 401 handles RMD withdrawals, so you can factor that information into your decision-making.

Certain situations may merit special consideration

Also, if you need to protect your savings from creditors, take a close look at your plans rules. Workplace retirement plans typically offer better protection from creditors than IRAs do.

The best decision for you

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