What Should You Do With Your 401k When You Retire

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What To Do With Your 401 Money When You Retire

What to do with your 401K When you Retire or Change Jobs

By Rodney Brooks, Next Avenue Contributor

Billions of dollars are at stake as boomers decide what to do with the $5.3 trillion theyve invested in company-sponsored 401 plans when they retire. Leave the money where it is? Roll it over to an Individual Retirement Account at a financial firm? For many, its a head-scratcher.

The topic is especially timely with the Wall Street Journal recently reporting that the U.S. Department of Labor is looking into whether Wells Fargo has been pushing retiring clients to move their 401 money into more expensive IRAs at the bank.

Financial advisers say there are pros and cons to leaving your 401 in place and to rolling it over into an IRA.

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It depends on the individual needs of the employee and the quality of the plan, says Harris Nydick co-founder of CFS Investment Advisory Services in Totowa, N.J., and author of Common Financial Sense, Simple Strategies for Successful 401 and 403 Retirement Plan Investing.

There is not a one-size-fits-all when it comes to making this decision, says Dan Houston, chairman, president and CEO of Principal Financial Group in Des Moines,

5 Reasons to Leave your 401 With Your Company

Here are five reasons to consider leaving your 401 with your company as 22% of 401 owners did when exiting, according to an Ameritrade survey rather than moving it to a Rollover IRA when you retire:

5 Reasons to Roll Over Your 401 Into an IRA

What Not to Do With Your 401

Here’s What To Do When Your 401 Is Losing Money

Generally, the best move to make when you see your 401 balance go down is to do nothing at all.

This advice generally echoes investment experts’ guidance when any of your investments are affected by market downturns. Investing is a long-term game you take the short-term dips in exchange for the potential long-term growth, which, history has shown us, is what happens. Though past performance does not predict future performance, historically, any short-term losses have typically been outweighed by larger long-term gains.

“In the long run, stock prices are the world’s way of appraising the value of the underlying companies,” Winsett explains. “In the short term, prices can be chaotically random but over time, prices are firmly rooted in the real value of real companies whose products and services we use regularly, if not daily.”

Making an impulsive move like panic selling your 401 investments or withdrawing early from your 401 would have serious consequences. If you sell only to later jump back in the market, you may time it incorrectly and miss out on an upswing, or big recovery gains. Staying invested means as the market recovers, so, too, does your account balance. Dipping into your 401 funds before reaching the age of 59½, meanwhile, entails a 10% early withdrawal penalty on top of it being taxed.

Convert To An Ira To Keep Contributing

You cannot contribute to a 401 after you leave your job, so if you want to continue adding money to your retirement funds, youll need to roll over your account into an IRA. Previously, you could contribute to a Roth IRA indefinitely but could not contribute to a traditional IRA after age 70½. However, under the new Setting Every Community Up for Retirement Enhancement Act, you can now contribute to a traditional IRA for as long as you like.

Keep in mind that you can only contribute earned income, not gross income, to either type of IRA, so this strategy will only work if you have not retired completely and still earn taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment, as the IRS puts it. You cant contribute money earned from either investments or your Social Security check, though certain types of alimony payments may qualify.

To execute a rollover of your 401, you can ask your plan administrator to distribute your savings directly to a new or existing IRA. Alternatively, you can elect to take the distribution yourself. However, in this case, you must deposit the funds into your IRA within 60 days to avoid paying taxes on the income.

Traditional 401 accounts can be rolled over into either a traditional IRA or a Roth IRA, whereas designated Roth 401 accounts must be rolled over into a Roth IRA.

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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.

What To Do With Your 401 When You Change Jobs

What Should I Do with My Old 401k?

In all the excitement of changing jobs, your 401 retirement savings may be the last thing on your mind, especially if you’re young. But considering you may need about 80% of your annual preretirement salary each year you’re retired to maintain your current standard of living, it’s worth taking a look at options to secure both your 401 and your financial future.

Read Also: Is 4 Million Enough To Retire At 65

Pros And Cons: 401 Vs Ira

401 Pros

  • Offer protection from creditors under federal law, and funds cannot be seized in bankruptcy proceedings
  • Depending on the plan, you may be able to borrow money from your account
  • Required minimum distributions dont begin until you retire
  • Usually offer fewer investment options
  • Less control over your savings
  • Not all plans offer a Roth option
  • Can sometimes involve high management and administrative fees
  • Usually offer a wider variety of investment options
  • More control over your money
  • Option to choose between Roth IRA and traditional IRA
  • No required minimum distributions for Roth IRAs
  • Rollovers from 401s are protected in bankruptcy, though protection from other types of creditors varies by circumstances and state
  • Cannot borrow money from IRA accounts
  • Traditional IRAs require you to take minimum distributions beginning at age 72
  • In most circumstances, you must be 59 ½ to avoid the premature distribution penalties

How Much Income Do You Need To Retire

Hopefully, you’ve already done some retirement planning in advance of making your decision to retire. But if you’re currently in planning mode, a great place to begin is with a retirement savings calculator, which can be a quick way to know if you have enough savings and income to retire. For help determining how much you might need, you could also try a retirement cost of living comparison calculator.

Recommended Reading: How Much Is Social Security Taxed In Retirement

Keep Your Money In Your 401 Plan

Many employers will allow you to keep the money in the 401 plan, even after you retire. While not the best course of action, its not a bad idea if you have a really good plan. All 401 plans, and associated fees and investment options, vary from plan to plan. However, most plans arent 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 plans, since they are so different. Its up to you to decide if you are better off leaving your money there. For some, thats not even an option. Once you leave a job, you might be forced to move your 401 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.

What To Do With Your 401k In Your 20s

Rethinking Retirement: Should you withdraw from your 401k? Know your options

We all know that it is important to save money in our 20s. This is because we are still young and have much work ahead of us. Instead of spending on unnecessary things, we should focus on building up our savings accounts.

It is very important to save money because it will help you have more money in the future. It will also help you to be able to invest in your future and also provide for your family.

Here are some tips on how you can save money:

  • Automatic enrollment: This is a great way for employers to ensure their employees are saving for retirement. By automatically enrolling their employees into a retirement plan, employers can avoid having to do anything and just let the default contribution rate take care of itself.
  • Contribution rates are how much an employee or employer has to contribute toward their retirement account each pay period. The higher the rate, the more they have saved when they retire.
  • Employer contributions: Employers can contribute toward their employees retirement.

In addition, one of the most common ways is investing in an index fund. Index funds can invest in stocks, bonds and other securities representing a broad market index like the S& P 500. They are mutual funds, meaning they are open to anyone and operate for the benefit of their investors.

Index funds allow investors to diversify their investments across different sectors and asset classes, which can help them achieve their investment goals.

Recommended Reading: What Do People Do After Retirement

A Roth 401another Option Worth Considering

Whether or not you choose to open an IRA, if your employer offers a Roth 401, you might also consider adding this to your retirement savings strategy. There are no income limits to participate in a Roth 401, and you can have both types of 401 at the same time. Having both doesn’t mean you can contribute more than the total annual 401 contribution limit, but you can split your contributions between the two, giving you a combination of both taxable and tax-free withdrawals come retirement time.

Can You Lose Your 401 If You Get Fired

There are two types of 401 contributions: Employers and employees contributions. You acquire full ownership of your employers contributions to your 401 after a certain period of time. This is called Vesting. If you are fired, you lose your right to any remaining unvested funds in your 401. You are always completely vested in your contributions and can not lose this portion of your 401.

Recommended Reading: Savings Needed To Retire At 62

Do You Have Other Investments Or Retirement Accounts

When planning for retirement, your primary considerations are how much income you’ll need and where the money is coming from. If you have multiple investments and retirement accounts, it’s generally wise to withdraw from taxable brokerage accounts first and tax-deferred accounts, such as your 401, last. Financial planners call this order of liquidation withdraw from certain accounts first while allowing others to continue growing. The idea here is that deferring large tax bills as long as possible could potentially extend retirement savings.

What To Do With Your 401 When You Retire

What To Do When Your Employer Stopped Matching Your 401K

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You know all about saving in your 401 while youre working, but how exactly should you handle those savings when you retire?

If youre not sure, join the crowd.

A quarter of 401 participants 45 and older say they dont know what theyll do with their retirement account when they retire, according to a survey of 1,000 people with a 401 account conducted for Cerulli Associates, a research and consulting firm.

Another 25% said theyll ask their financial advisor what to do, which is another way of saying theyre not sure what to do.

The best approach depends on your situation. Following these four steps can help you get started.

Recommended Reading: Qualified And Non Qualified Retirement Plans

You May Have A Roth 401 Option

Another choice to consider: a Roth 401, which almost 90% of plans offer, according to the Plan Sponsor Council of America. As with a Roth IRA, you are allowed to put in after-tax money in exchange for tax-free growth and tax-free withdrawals in the future.

Things get a little trickier if your employer offers a 401 match, as the match can only go into a traditional 401. The solution is to have one of each. Note that a proposal in the Securing a Strong Retirement Act, which has been nicknamed the SECURE Act 2.0, would allow workers to have employer matching contributions invested in a Roth 401.

One significant difference from a Roth IRA is that there are no income limits on Roth 401 contributions, so these accounts provide a way for high earners to access a Roth option. In 2022, you can contribute up to $20,500 to a Roth 401, a traditional 401 or a combination of the two. Workers 50 or older can contribute up to $27,000 annually.

But beware: Unlike IRA Roth conversions, you cant undo a 401 Roth conversion — the decision is irrevocable.

Con #: You Have No Choice In What Funds Your Former Employers Choose

Since your former company administrates the retirement plan, youll only be able to select funds from the options they provide. For example, if youve read some great information about a mutual fund that focuses on sustainable agriculture but your plan doesnt offer it, youll need to go elsewhere to invest in it. You’re losing the flexibility that you could have with a traditional or Roth IRA, adds Markwell.

Read Also: Retirement Plan And Ira Required Minimum Distributions Faqs

Put The Money In A Traditional Ira

401s have significant advantages over IRAs during your working years because it’s so easy to contribute to a 401 and because the resulting tax break is automatic. With an IRA, you can still get a tax break, but you have to claim it on your tax return as a deduction, which can be a bit of a hassle. But once you retire, the advantage shifts to the IRA. That’s because IRAs have access to pretty much the entire world of investment options, while 401s typically only have a few investments available to choose from.

What’s more, the investment options in your 401 can change at any time based on decisions made by your former employers, while the investments in your IRA are entirely in your control. All in all, rolling over your 401 balance into an IRA after retirement makes a lot of sense.

Mistake #: Borrowing From Your Qrp

What Should You Do with Your Dormant 401k for retirement?

Many QRPs allow you to borrow from your account. Unless you need the money for an emergency, try not to. Borrowing can be an expensive choice, in two ways:

  • Smaller retirement savings: When you take out a loan you are losing the potential for investment growth and that could leave you with a smaller retirement savings. How much smaller? This depends on a number of factors, including the size of the loan, the repayment period, whether you continue contributions during this period, the earnings on your account, and the loan interest rate. Also, if you stop contributing while you are paying back your loan, you wont receive any employer matching contributions.
  • Repayment requirements: If you lose your job or take another one, youll have to repay the money quickly, generally by your tax filing deadline. However, if not repaid, the outstanding loan balance is generally subject to income tax and possibly an IRS 10% additional tax for early or pre-59 1/2 distributions.

In addition, cashing out of your 401 when you move to a new employer might be costly as well. Know your distribution options when changing jobs.

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Periodic Distributions From 401

Instead of cashing out the entire 401, you may choose to receive regular distributions of income from your 401. Usually, you can choose to receive monthly or quarterly distributions, especially if inflation increases your living expenses. If the 401 is your main source of income, you should budget properly so that the distributions are enough to meet your expenses.

For example, if you have accumulated $1 million in retirement savings, you can choose to receive $3,330 every month, which amounts to approximately $40,000 annually. You can adjust the amount once a year or every few months if your 401 plan allows it. This option allows the remaining savings to continue growing over time as you take periodic distributions.

Traditional Or Roth Ira

Your retirement savings can be rolled over into an IRAeither a traditional IRA or a Roth IRAthat can offer you some advantages for your money.

Traditional IRA vs. Roth IRA
Traditional IRA Roth IRA
  • You have access to a wider range of investment options since you aren’t limited by the plan your employer chooses.
  • You might save money on administration and management fees.
  • Your savings maintain their tax-deferred status and you typically won’t pay taxes or early withdrawal penalties at the time of transfer.
  • It may be possible to consolidate several retirement accounts into a single IRA.
  • Your 401 earnings and contributions can be rolled over into your Roth IRA tax-free.
  • Any contributions you make going forward are also tax-free.
  • Like a traditional IRA, you can typically consolidate many retirement accounts into a Roth IRA.
  • You may have many more investment options to choose from than with an employer-sponsored 401.

Read Also: How To Maximize Your Retirement Income

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