What should you do with your 401(k) when you retire?

Category : Blog on February 24, 2019

401k retirement optionsAt retirement, an individual who’s been a member of an employer’s 401(k) scheme needs to figure out what to do with the balance in their retirement account. There is more than one option to consider and it is important to understand what choices are available.

Leave the 401(k) with your employer

The easiest thing to do is to just leave the 401(k) balance where it is. By the time individuals retire they are likely to be familiar with the plan and the investment options and the account remains tax-deferred.

Financial objectives may alter during retirement with more emphasis on capital preservation than appreciation. If more conservative funds are required then it’s usually easy to do this in the 401(k) plan without incurring transaction fees. Rebalancing exercises should also be available cost free.

Typically, 401(k) plans allow payments on a monthly or quarterly basis, and retirees are normally allowed to change that amount once a year (some plans allow more frequent changes). The biggest predicament for many is to understand how much to withdrawal so their capital does not run out.

That said, many 401(k) plans offer limited choice of mutual funds and have higher fees. In many cases staying with your employer’s plan will not be the best approach.

Roll over your 401(k) into a Traditional IRA

For individuals who prefer to have more options for their investments, rolling over a 401(k) balance into an IRA may be a suitable choice. A traditional IRA is a tax deferred account and so, just as with a 401(k), income and gains can accumulate tax free until withdrawn. The investment options available in IRAs are far larger and will normally include access to a number of low fee options.

Individuals with more than one 401(k) account from previous employers should consider consolidating their 401(k)s into one account. This can be done with an IRA and should provide an easier way to manage all investments.

Buy an annuity

For those who require guaranteed income to cover basic fixed costs of living, an annuity is yet another option. An annuity should be thought of primarily as an insurance product (not an investment product) which guarantees regular lifetime income. This is potentially useful for those who believe they might run out of money during retirement.

However, the annuity market is rife with pitfalls and most are “sold” not “bought”. Single Premium Immediate Annuities (SPIA’s) are probably the most client friendly type of annuity. These are lifetime income annuities that can be set up to function in a very similar manner to a pension. However, always be careful to read the fine print and understand exactly how the product is structured (below the headline terms, contracts can often include unattractive conditionality).

Lump Sum

It is possible to simply withdraw the entire amount as a lump sum. Taking a lump sum is likely to generate a large tax bill and this route shouldn’t be undertaken without advice from a tax expert.

Low Cost Financial Advisor Seedlings

Investing Quotes

loading Loading

    • “Be fearful when others are greedy. Be greedy when others are fearful.”

      —Warren Buffett

    • “The individual investor should act consistently as an investor and not as a speculator.”

      —Benjamin Graham

    • “Know what you own, and know why you own it.”

      —Peter Lynch

    • “Sometimes your best investments are the ones you don’t make.”

      —Donald Trump

    • “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

      —George Soros

    • “My favorite holding period is forever.”

      —Warren Buffett

    • “The essence of investment management is the management of risks, not the management of returns.”

      —Benjamin Graham

    • “You make most of your money in a bear market, you just don’t realize it at the time.”

      —Shelby Davis

    • “We have two classes of forecasters: Those who don’t know and those who don’t know they don’t know.”

      —John Kenneth Galbraith

Latest Blog