Already Retired? 401(k) Help for Retirees
There’s an effort being made to find a better word than “retire” to describe the act of putting your working years behind you.
Taken literally, “retire” means “to withdraw,” something that people finally leaving their jobs after decades might object to. Another, possibly more fitting way to think about being retired is “having arrived.”
For years you have worked and contributed to your retirement accounts, and now, finally, the time has come to enjoy what you’ve worked and saved for – in other words, you’ve arrived!
At Scarborough Capital Management, we work with a lot of professionals to help them with their retirement goals. But then what? Do you just cash out all your savings and set off for a lifetime of margaritas and living on a beach in Mexico? In most cases, probably not. As it turns out, what you do with your retirement accounts after the big day can actually be a lot more complex and come with regulations you might not have considered.
For example, do you know what the contribution limitations and withdrawal requirements are for your 401(k) account now that you’ve retired? Do you know what your options are?
When the retirement party is over and your office is empty, a lot of retirees are lost. What are the next financial steps? They need help. So, here’s some 401(k) help that can help put you on the right track in retirement.
One of the most asked questions about a 401(k) in retirement is what to do with it.
- Should you leave your 401(k) as is?
- Should you roll it over into an Individual Retirement Account (IRA)?
- Should you start taking withdrawals from your 401(k)? If you do take withdrawals, should you take a lump sum or annuity-like distributions?
The answer can be complex. Even within these three options, there can be many more nuanced decisions to make.
How can your 401(k) help you best in retirement? There are a few things to consider.
Your Age Counts
The first and probably most important things to consider are your financial needs and your age.
If you’re relying on distributions from your 401(k) as retirement income, you can begin making withdrawals without being subject to 10 percent early withdrawal penalties, as long as you’re at least 59-½. Although you don’t yet have to take distributions at this age, you will no longer be able to contribute funds into the account once you have retired. If you want to continue putting money into a retirement savings account after you’ve retired, you should consider other investment vehicles.
If you are between the ages of 55 and 59-½, and you either retire or lose your job, you may also be able to avoid the early withdrawal penalty, as long as you withdraw funds only from a 401(k) account from the employer you just left. This is called a 72(t) distribution. While they are not subject to the 10% penalty for early withdrawal, all withdrawals are subject to current taxes and must meet IRS withdrawal schedule guidelines. Further, taking any early distributions from a retirement account reduces the amount of money available for later use. When a 72(t) distribution is setup to pay out an income stream, it must continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever comes last. Consult with your tax advisor before taking 72(t) distributions.
If you’re 72 or older, you do need to start taking withdrawals of at least a certain amount from your 401(k), whether you need the money or not. These are known as Required Minimum Distributions (RMDs).
Learn About Your RMDs
RMDs are personal and user specific. The amount of your RMDs are determined each year by calculating your life expectancy and your account balance. You must take at least that amount, either in one withdrawal or in multiple withdrawals every year.
If you do not take the full amount of your annual RMD by the required deadline, you can face a painful penalty: The amount you should have withdrawn will be taxed at 50 percent.
Note: The age at which you must begin taking RMDs went up. Before the SECURE Act went into effect in December 2019, you had to begin taking RMDs at the age of 70-½. Now you have until April 1 in the year after you turn 72 before you have to start making regular withdrawals.
Let it Grow, Let it Grow
As long as you’re under the age of 72 and you don’t need the money, you don’t have to take distributions from your 401(k) account right now, and your plan administrator is required to maintain your 401(k) if you have more than $5,000 invested.
What this means is, if you don’t financially need to take withdrawals (i.e. you can comfortably afford to live on other sources of income), your untouched savings can remain invested and potentially increase your future investment income more than if you were to making regular withdrawals.
Shop Around for Better Investment Options or Lower Fees
Whether you decide to begin taking distributions right away or to let your 401(k) continue to grow, this is a good time to evaluate your portfolio and decide if your current account setup is right for you now that you’ve retired.
You typically have four distribution options from your 401(k).
- Leave the money in the plan, if permitted, and withdraw as needed.
- Roll over the assets to the new employer plan, if permitted.
- Roll over to an IRA account.
- Take a cash distribution which you’ll pay federal and state taxes on the entire amount and if you’re not yet 59 ½ you may also pay an additional 10% penalty.
Before you decide to leave your money where it is or roll it into a new account, make sure you know what fees your account would be subjected to. 401(k) plans have fund fees, in addition to administrative and other fees. IRA accounts also have expenses that can vary based on the management of the account in addition to management fees. Understanding the amount and types of fees associated with your investment accounts will help you make prudent decisions.
It’s wise to discuss your options with a financial advisor who specializes in 401(k) plan management.
Another consideration is streamlining your retirement accounts, if you can.
If you have multiple 401(k) accounts with previous employers, you might want to consider consolidating them into a single account. In addition to making RMDs less confusing – with multiple accounts come multiple RMDs – consolidating might help you save on fees, and having one retirement account instead of many can make things easier for your beneficiaries to deal with when you’re gone.
Consult a Financial Advisor
Now that you’ve retired – ahem, arrived – there is no time to sit back and get lackadaisical about money management and your retirement savings. There are many requirements and options, and the penalties for making mistakes or taking a wrong turn can be hefty, so it is strongly recommended that you talk to a financial advisor about your situation, your accounts and what options make the most financial sense for you and your 401(k) account in retirement.
Don’t try to do it all on your own. The financial services industry can be confusing. If you want 401(k) help and don’t want to make the same costly mistakes many retirees do, seek help from a professional.