There are multiple ways to handle the balance of your 401(k) once you reach retirement age. You can freely withdraw some of all of the balance as a lump sum, you can rollover the balance into an IRA or to a different qualified retirement plan. In some cases, your specific 401(k) plan may have additional options such as converting the balance into an annuity.
After you reach full retirement age of 59 ½, most 401(k) plans allow you to freely make distributions to yourself directly as frequently as you want for as much of your balance as you choose. However, for pre-tax “Traditional” 401(k) balances, any amount distributed to you is reported as taxable income in the year of the distribution.
A common choice many individuals make after they retire is to rollover the balance of their 401(k) into an IRA. An IRA may result in lower total fees as well as increasing the investment options available to you in retirement. For 401(k) plans that have restrictions on or fees applied to withdrawals, an IRA may also provide greater flexibility for you when taking income for living expenses and other needs.
Beginning at age 73, 401(k) participants must begin making required minimum distributions if they are no longer working for the company that sponsors the 401(k) plan.
Yes. This can generally be done through two options.
The first is by taking out a loan against what’s in your 401(k). Not all plans have this option, but those that do may allow you to secure a loan you can use to pay off high-interest debts. Then you can repay the loan over time.
The second is by making an early withdrawal of your plan’s funds. This is a more-drastic measure and may result in penalties for early withdrawal.
It is important to consider the tax implications of any withdrawal from a 401(k) Plan.
Most 401(k) plans have imbedded fees related to the administration and recordkeeping of the plan. Some plans may also pay an advisor who helps the company select eligible investments or provide education to participants. These costs may be paid by the company or borne by plan participants. It is important to understand the fees that will be applied to your account in any 401(k) plan.
If you choose to utilize the investment options in your 401(k) plan, most or all of the investment options are inherently risky and their value will fluctuate based on market performance over time.
It is also important to consider the “opportunity cost” of contributing to a 401(k). In many cases, saving into a 401(k) for retirement is one of the most productive ways to provide income for the future. However, contributing to a 401(k) when additional cash flow might be needed before retirement, may be unwise. If you would likely need to take a pre-retirement distribution in the next few months or years from your 401(k) to pay for more immediate needs, it may be more efficient to forgo making contributions for a short period.
This depends on the 401(k) plan your employer offers. Most plans allow employees to choose among a list of specific investment options. Usually, these investment options are mutual funds representing various asset classes or sectors of stock and bond markets.
Mutual funds are groups of stocks bundled together. This bundling helps create a kind of diversification.
If you’re concerned about which investments are part of your 401(k) plan, this information may be in the paperwork provided with the fund. You can also talk to your employer or your 401(k) provider for more clarity.
In most cases, yes. You will need to check with your plan administrator to determine if your plan allows for 401(k) loans, hardship withdrawals, or other provisions to allow you to withdraw before retirement. However, you may be penalized if you make withdrawals before age 59½. For most withdrawal types, you may have to report the amount you receive as income on your taxes.
There are some exemptions to penalties for accessing your 401(k) funds early. For example, if you transfer the money to certain accounts, such as an IRA, you may not incur a penalty, regardless of your age. Talk to your financial advisor to help decide whether early access to your 401(k) funds makes sense for your specific situation. But in general, leaving your 401(k) alone until you’re ready to retire is potentially a smart app
This varies depending upon the plan and the provider. Some plans have no limits on changes you can make, such as investment contribution amounts and frequency. It’s best to contact your employer or 401(k) provider to learn these details.
The main distinction concerns the tax treatment of contributions and distributions.
With a traditional 401(k), any contribution you make is considered “pre-tax.” This means contributions are not taxed before they go into your 401(k). This allows contributors to receive a tax deduction for the amount going into the plan. However, distributions made in retirement are treated as ordinary taxable income.
For a Roth 401(k), your contributions are “after-tax” funds. This means they are taxed before they go into the account. However, when it’s time to access those funds at retirement, you won’t pay taxes on what you withdraw as long as distributions are made in a qualified manner.
Most 401(k) plans that offer the option of contributing to a Roth 401(k) allow you to split your contributions into both types of accounts. Check with your specific plan rules for details.
Yes. If you begin contributing after the age of 50, you can invest more than the normal limit. This gives older investors the opportunity to build a larger 401(k) in preparation for retirement.
For people under 50, the 401(k) contribution cap is $23,000 per year. For people over 50, the limit (including catch-up contributions) is $30,500 per year. Keep in mind that these limits are for any 401(k) plan contributions. So, if you’re over 50 and you have two 401(k) plans, your total contributions across both plans cannot exceed $30,500.
You can contribute to both a 401(k) and an IRA at the same time. But doing so may have an impact on your IRA deductions, consult with your financial advisor to ensure that contributing to both makes sense for you financially.
If you decide to change jobs, you can move your 401(k) funds to a 401(k) plan offered by a new employer. This is a common option that employees often take to better keep their retirement assets consolidated.
You can also roll the money over into an IRA instead and manage investments more directly. This may allow you to save on fees compared to rolling the funds into a new company’s 401(k) plan.
While you are free to cash-out a 401(k) after you leave your job, this is typically a poor option as you may be subject to an early withdrawal penalty of 10% in addition to paying ordinary income tax on the amount of your withdrawal.
When it comes to filing taxes, your contributions are tax-deferred. This includes your employer match, if there is one. This also includes capital gains, dividends, and interest accrued within the plan account. So, you don’t pay income tax on these contributions or earnings until you access the funds in retirement.
Some plans allow people to take out a personal loan from their account. But if for some reason you are unable to repay the loan and accrued interest, most plans will reclassify the loan as a distribution. This is the same as an early withdrawal and may result in taxes and penalties.
Yes. The IRS taxes early distributions in the amount of 10 percent of the money withdrawn. Thus, an early withdrawal of $10,000 will result in a penalty of $1,000 in addition to taxes at your marginal tax rate.
After death, 401(k) assets are passed to whoever is designated as the beneficiary of the plan. These beneficiaries may be spouses, children, or other relatives. The beneficiary provisions on a 401(k) plan supersede any directives laid out in a Will. It is important to periodically review the beneficiaries on your 401(k) plan to ensure your wishes will be accurately carried out.
If your plan includes an employer match, your employer will match your contribution up to a certain amount. This match is essentially extra compensation, rewarding employees who are proactive about their retirement savings.
For example, if you earn $100,000 in a year and your employer matches 5% to a 401(k) plan. You will receive matching contributions on the first $5,000 of contributions you make to your 401(k) account.
Yes. Self-Employed 401(k)s, sometimes called a solo 401(k), can be established for self-employed individuals and small business owners.
Yes. Various 401(k) plans are structured differently. Review your plan’s paperwork or speak with your employer to learn how your plan is structured.
In the vast majority of cases, your 401(k) participation has no effect on your eligibility for Social Security benefits. These are two different types of retirement benefits that are not connected. If you have a 401(k) and access it during your retirement, you may receive those funds alongside your Social Security benefits.
Yes. Rolling your 401(k) over into an IRA is an option. In some cases, it may provide you with the benefits available for retirement accounts with fewer restrictions when it comes to accessing your funds later. Talking with a financial advisor about your specific needs will help you determine if this is the right move for you.
Yes. If you already have a pension, you can still contribute to your 401(k) plan. This just gives you more financial support for your retirement years.
Use our guide of questions that are essential to ask an advisor before you hire them. Don’t make a mistake by working with the wrong financial advisor. Ask the right questions to determine if a financial advisor is right for you.
