401(k)

To start, we’ll address one of the most common retirement accounts, a 401(k). A 401(k) is a qualified plan authorized by employers, in which employees can defer their tax burden on contributions until age 59 1/2, after which withdrawals are taxed as ordinary income.

You have several 401(k) distribution options to choose from when withdrawing your funds. You can…

  • Withdraw a lump-sum distribution. This means, if you need money in a pinch, you can dip into your 401(k), but you no longer get to reap the benefits of deferring your tax burdens since you’re taking out a large amount of cash at once, and will have to pay income taxes (for that year) on that distribution. Withdrawing a large sum of money will incur a large amount of taxes, so you may want to avoid this option for the sake of owing more manageable tax payments.
  • Leave your money for as long as possible, if you have other taxable accounts you can withdraw from. This method makes sense because it allows you to keep your 401(k) money growing, tax-deferred. If you have other accounts to tap, you can withdraw from them first, but when you’re 70 1/2, the government requires all retirees to begin taking annual distributions from their funds housed in 401(k)s and traditional IRAs.
  • Roll your money into an IRA. Financial advisors usually recommend this method, especially if your 401(k) does not leave you with many options (401(k)s vary). IRAs offer more selection in terms of investment choices, as well as control. If you have multiple retirement accounts, it might make sense to consolidate your accounts into an IRA so they will be more easily managed, and heighten your chances of being eligible for break points in mutual funds.
  • Periodic distributions. You can select an amount of income to receive periodically (monthly or quarterly), and usually you can change that amount once annually, but some plans allow more frequent changes.
  • Buy an annuity. An annuity is a financial product, which you purchase through a series of payments or a lump sum payment, and in exchange, receive regular disbursements started from that moment or at a later point in the future. Annuities work on a tax-deferred basis, similarly to 401(k) contributions, and can only be withdrawn penalty free after the age of 59 1/2. The benefits of using your 401(k) funds to buy an annuity is the guarantee that you won’t be put in the sticky spot of possible outliving your assets. Though each month’s check won’t be as great, you will have the financial security of guaranteed income for the remainder of your life.

The benefits of using your 401(k) funds to buy an annuity is the guarantee that you won’t be put in the sticky spot of possibly outliving your assets. Though each month’s check won’t be as great, you will have the financial security of guaranteed income for the remainder of your life.

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