Do you know what you are going to do with your 401k once you retire?
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 about retirement plans, and it makes people think they have to get all their savings into one IRA, or cash their 401k in all at once. This, of course, is not true, but without the benefit of good wealth education, few people actually 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. Such requires that you first withdraw your entire retirement savings at once. Upon doing so, you will figure your taxes on this amount by dividing the total by ten and then adding an additional $ 2,480 to the sum. Look up the rate for single taxpayers in 1986 and multiply it by ten. The resulting figure tells you how much you owe in taxes for your withdrawal using 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.
Two things to note if you plan on using this strategy: First, the IRS will only allow you to use it once and, second, you can’t roll over part of your 401k and use ten-year averaging on the remaining amount. 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 your company’s policy on doing so if you believe this will be of benefit to you.
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 you need to look into this on your own, or with a qualified financial planner if this option fits your retirement needs. This could be a good idea if your company will let you leave some money in your 401k and roll over 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. Of course, ordinary taxes will be due on distributions, but, depending upon how much is in your account, this may be a smart option.
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. Bear in mind also that persons at least 70 years and 6 months of age are required to start withdrawing from retirement funds at this age. The only exception to this is money in a Roth IRA or if money is in a 401k with a company that still employs the person, provided that the employee does not own more than five percent of the company in question.
