Do you know what you will do with your 401k after retirement?
Most people don’t. With more and more Americans retiring early in order to pursue other careers or small business opportunities, this question is being investigated more than ever. Myths abound, which lead people to believe that they must immediately roll all of their retirement savings into a single IRA account or, at least, cash out of their 401k plan all at once. It isn’t true, and without the benefit of wealth education, few people know what their retirement plan options are.
Consider the following suggestions:
Suggestion Number One
If you were born before 1936 and have participated in your 401k for at least five years, it is possible that you qualify for an excellent tax strategy commonly referred to as a ten-year averaging. It requires you withdraw your entire retirement savings at once. When you do so, figure your taxes on this amount by dividing the total by ten and add $ 2,480 to the sum. Next, research the 1986 rate for single taxpayers and multiply that amount by ten. The figure tells you what you owe for your withdrawal in tax penalties for exercising this option. If your 401k is less than $ 400,000 all told, you might save a lot on taxes by using the ten year average calculation.
Note the following: First, the IRS will only allow you to use it once, and second, you can’t roll over part of the 401k and use the ten year averaging on the remainder. That said, the benefit to this strategy with a complete withdrawal is taxes were less in 1986 than they currently are, and the rate for single taxpayers from that year will yield more savings.
Suggestion Number Two
Some companies allow retirees to leave some or all of their money in an existing 401k plan. Find out the policy your company has on this, to figure out if it will be a benefit or not.
Suggestion Number Three
Roll your money over into one or more IRA accounts. You can do this as many times as you want in as many IRAs as you want. Take the time to investigate this option on your own or with a qualified financial planner to determine if doing so fits your retirement needs. This might be an especially good idea if your company will allow you to leave some money in your 401k and roll over just a portion of the rest.
Suggestion Number Four
People who will be fifty-five years or older in the year that they retire may also consider cashing out of their 401k all at once or in part without penalties. Obviously, taxes will be due on distributions, but it could be a smart option depending on how much is in your account.
While these suggestions are meant to give you guidance on what to do with your 401k account when you retire, they should not be used in lieu of or to substitute the advice of a qualified professional. Also, do keep in mind that senior citizens age seventy and six months are required by law to begin taking money from all retirement accounts at this time. The exception is that funds in Roth IRAs or funds in a 401k with a company a person still works for, if that person doesn’t own more than 5 percent of that company.
