Your retirement is fast approaching and you have been pouring money into your 401k for the last thirty to forty years. The question now is how do you turn this accumulated account into a retirement nest egg. Along with Social Security benefits and pension plans, 401k accounts will be one of the primary sources of income when seniors leave work behind and begin a new life of retirement. There are numerous options that you will have when it comes times to figure out what to do with this 401k account. This article will briefly describe what a 401k account is and what those options are.
Almost everyone in corporate America puts a portion of earned income into a 401k. Surprisingly, though, many of these people are not confident on what a 401k’s function actually is. A 401k plan is an employer-sponsored retirement plan that allows employees to contribute money for retirement while deferring any income taxes until withdrawal. As an added employee benefit, employers will often match contributions made into the account by the employee. The money put into a 401k is usually placed in investments so that your account can receive compounded gains over the years. The idea is that when the retired employee takes money out after the age of fifty-nine and a half years, they will likely be in a lower tax bracket than when the money was initially earned. Withdrawing money before this age results in a stiff penalty being assessed.
Since the money contributed to 401k accounts are not taxed until it is taken out, the retired employee is left with multiple options when they finally reach the legal age for withdrawal. This list will give you an idea of what possibilities you will have at your discretion. When deciding on your withdrawal approach, it will be important for you to weigh multiple factors such as your age, additional income sources, your tax bracket, and your comfort level in asset management.
Keep your money in 401k
Find out if your company will allow you to keep your money in the 401k account and withdraw it later. You may be able to do this until you reach the age of seventy and a half. At this point, the government requires you to start withdrawing money or otherwise pay a costly penalty. This method is most practical if you have other resources to live off of when you initially retire.
Cash your money out of 401k
If you need the money or you believe you can more effectively invest the money yourself, you can choose the option of receiving a lump sum cash out. Keep in mind the fact that you will be charged income tax on this entire amount of money that you withdraw.
Withdraw money in installments
Instead of having to decide to take your money out in one lump sum, some 401k plans allow you make incremental withdrawals within a pre-defined time frame.
Rollover to an IRA
You can rollover the lump sum of your 401k into a traditional IRA. These IRAs can be obtained through mutual funds, stock brokerages, banks, and credit unions. The benefit of IRAs allow you to buy and sell a variety of investment vehicles to help you maximize your earning potential.
Convert into an annuity
If your 401k plan allows you to do so, you can convert a portion or all of your assets into an annuity. The great thing about this is that you are guaranteed regular fixed payments so you can count on this as a reliable income source during your retirement.
If you desire, you can also combine two or more of these options to create the best financial situation for your circumstance. Review your company’s policies regarding their 401k plans and the withdrawal methods available. Also, be certain to consult a certified tax professional or financial advisor to discuss in greater detail all of the options available to you.
