Financial Focus/How Should You Take Money From Retirement Plan?
Sooner or later, the day arrives when you face a difficult question: How should you take the money from your 401(k) or other tax-deferred retirement account? Assuming you are retiring, and not going to another job, you have several options - so you'll want to plan ahead to make the right decision.
Let's look at your choices:
* Take money as a lump sum - It's tempting to take a large stash of cash - but such a move may actually rob you of wealth. If you take all your money at once, you'll lose the benefit of tax-deferred earnings growth, which will be important if you spend two or three decades in retirement. Also, if you take your money at one time, you'll face a big income tax hit the year of the withdrawal. (However, depending on when you were born, you may be able to lower your tax bill by using a special formula that allows you to treat your lump sum, from a tax standpoint,
as if it were paid out over 10 years.)
* Roll over money into IRA - If you choose to roll your 401(k) into a ̉traditional'' IRA, you'll gain some key benefits. First, you'll avoid immediate income taxes. Second, your earnings continue to grow on a tax-deferred basis. And third, you'll be able to place your 401(k) funds in virtually any investment you choose - stocks, bonds, mutual funds, etc. Plus, you won't have to start taking withdrawals until you reach 70 1/2. IRAs provide you the most flexibility in planning how you withdraw your money during your retirement, and how your beneficiaries can withdraw it after you're gone.
* Receive lifetime income stream - Your former employer may allow you to set up a lifetime payout option with your 401(k) funds. Depending on the specifics of your employer's plan, these payout options can provide you - and even your spouse - with a lifetime income stream. At first glance, this income may look attractive, but it has some drawbacks. Specifically, your payments will stay the same over the years - so they will lose value to inflation. Also, once you move your 401(k) money into this payout option, you can no longer get at your principal, because you've converted it to income. This could be a problem if you ever face an unexpected need for a large sum.
* Take periodic distributions - If you like the way your money is invested in your 401(k), but you still need to get at it before you turn 70 1/2, you can arrange to take monthly or quarterly distributions, assuming your employer permits this. From year to year, you may be allowed to change the amount you withdraw, but you will have to plan these distributions carefully - so they'll last.
* Keep the money in your plan - Some employers permit you to keep your money in your 401(k) after you retire. If you have other sources of retirement income to live on, you can leave your 401(k) untouched until 70 1/2, when you have to start taking withdrawals. However, your options of how your account is paid - especially if you pass away before the amounts are distributed - may be limited by the plan.
Before deciding what to do with your 401(k), review your entire financial situation and consult with your investment and tax advisers. By making the right choice, you can go a long way toward enjoying the retirement lifestyle you've long envisioned.
This article was submitted by the local financial representatives of Edward Jones: Greg Garner, AAMS, 301-733-9465; Dave Walker, 301-766-7300; Joan Bowers, 240-420-8514; John R. Pullaro, 301-824-7726; and Todd Streett, 717-762-0911.