Financial Focus Does Annuity Payout from 401(k) Make Sense for You?
If you have a 401(k) plan where you work, youíll have an important decision to make upon your retirement. Specifically, how should you take your 401(k) money? Youíll want to make the right choice - because it can make a big difference in your life.
Letís consider the distribution options available to you:
* You can take the money as a lump sum - Many plans require participants to take their 401(k) in a lump sum distribution - and many people choose lump sums, even when they have a choice. If you need a large sum of money immediately upon retirement, taking a lump sum may be right for you. However, your plan will immediately withhold 20 percent for taxes, and you may have to pay more later.
* You can leave the money in your plan -Not all 401(k) plans offer this option. But if itís available, it may be a good choice for you if you like the investment options in your 401(k) and if the plan allows you to withdraw funds as often as you need after you retire. You will have to start making withdrawals by age 70 1/2.
* You can move your money into an IRA - If you move your 401(k) into a ďRollover IRA,Ē your money will continue to grow on a tax-deferred basis, and you will avoid the 20% federal withholding. You can withdraw money as you need it, subject to IRA minimum distribution rules, and youíll pay income tax only on the amount you withdraw. (If you make withdrawals before you reach 59 1/2, you may be subject to a 10 percent penalty.) Plus, you can fund your IRA with virtually any type of investment - stocks, bonds, government securities, etc.
Your final distribution option is to convert your 401(k) into a lifetime annuity, purchased from a private insurance company. Not all plans offer this choice, and, even when itís available, many people do not choose it. And yet, itís worth considering for one reason alone: It offers you an income stream you canít outlive. Every month, for the rest of your life, you will receive a check for the same amount of money - even if the payments exceed the amount you paid into your 401(k).
Furthermore, you can extend your annuity over the course of two lifetimes. Thus, when you die, your spouse will start receiving the monthly payments. As is the case with IRA withdrawals, your annuity payments are subject to ordinary income tax.
Clearly, a lifetime source of income may be of great value to you - especially when you consider that you could easily spend two or three decades in retirement. At the same time, youíll need to take into account two possible drawbacks to taking your 401(k) distribution as an annuity. First, your payments will not be indexed for inflation, so, over time, you will lose purchasing power. And second, thereís no death benefit to this annuity - when you and spouse pass on, your beneficiaries wonít get any payments.
As is the case with IRA withdrawals, your annuity payments are subject to ordinary income tax.
Ultimately, youíll have to look at your overall financial picture before you decide if taking your 401(k) distribution as an annuity is a good idea for you. If, after reviewing your situation, you identify a need for a regular source of income, the annuity may be a possibility. But if you know that youíll have enough money coming in from a variety of sources, and you want to maximize the assets you leave to your beneficiaries, you might want to consider other distribution options.
Itís your choice - so make it a good one.
This article was submitted by the financial representatives of Edward Jones in Hagerstown: Greg Garner, 301-733-9465; Dave Walker, 301-766-7300; Joan Bowers, 240-420-8514; and John R. Pullaro, 301-766-7300