What to Do With a 401(k) After Retirement
What to do with a 401(k) after retirement is based upon your individual plan, IRS distribution rules, and your age of retirement.
Ubiquity breaks it down by age group and helps you explore your retirement planning options.
Continuing contributions (Under 72 years of age)
- You may elect to rollover your 401(k) account into a Solo 401(k) or an IRA to continue investing.
- This solution is possible if you still earn some type of taxable wages, salaries, commissions, tips, or passive income from self-employment. Certain types of alimony payments may also qualify.
- Under the SECURE Act, you can now contribute to a traditional or Roth IRA for as long as you wish.
- Your plan administrator will distribute your savings into the new account for you within 60 days.
- You may also elect to receive a check and deposit the amount into the new account yourself.
- Rolling over your 401(k) within 60 days will prevent you from having to pay taxes on the full amount.
Taking early distributions (Under 55 years of age)
- You can take money out of a 401(k) now if you need it, but you will be required to pay a 10% IRS penalty and income tax on the amount you take out.
- You are not required to take a distribution as soon as you retire. Your plan administrator will still maintain your plan if you have over $5,000 invested, thus allowing your savings to accrue.
- You will be unable to contribute to a 401(k) held by a previous employer unless you choose to roll it over to a new 401(k) or IRA.
- If your account balance is between $1,000 and $5,000, your company is required to roll the funds into an IRA if they are forcing you out of the plan.
Taking advantage of the Age 55 Rule (Ages 55-59)
- You can avoid the IRS 10% early withdrawal penalty if you retire or lose your job after age 55. This tax-free distribution applies only to the money from the most recent employer you just left.
- If you had money in an earlier 401(k) account, it is still subject to the penalty unless you wait a few years.
Taking the money on-time (Ages 59.5 – 71)
- The penalty-free retirement age is 59 1/2, so if you have reached that point, you can begin taking regular distributions from your 401(k) in the form of an annuity, either for a fixed period or over your anticipated lifetime. You may also choose to take non-periodic lump sum withdrawals if it is your preference.
- Unless you have a Roth 401(k), you will pay tax on the distribution as if it were paycheck income. Roth accounts allow tax-free withdrawals if the account holder is 59.5 or older and has had the account at least five years.
- The rest of your 401(k) account balance remains invested according to previous allocations, so the performance of your portfolio will also dictate the duration of your payments to some extent.
Taking required minimum distributions (Ages 72+)
- You are generally required to take regular or periodic distributions by April 1st the year you turn 72.
- Some plans will allow you to defer distributions until the year after you retire if you’re still working.
- Your distributions will be calculated based on your account balance and life expectancy.
- You may choose to take out more than your RMD, but you cannot take out less.
- The age for RMDs used to be 70.5, but increased to 72 in December 2019 with the SECURE Act.
The IRS isn’t the only one who calls the shots with how retirement money is taken. Companies may have their own rules about taking distributions, so it is always wise to review your plan documents, call your financial adviser, or speak with your plan provider before making any decisions.
It’s easy to be overwhelmed with options when it comes to individual retirement plans and how best to choose and manage your 401(k). Ubiquity can streamline the process and help you tailor an approach that fits your unique needs.