Managing your 401(k) after you retire is just as important as managing it up until then.
There are many reasons for this, but the most important is that you will need this money for a long time. With good health and a lot of luck, you can spend almost as much time on your retirement as you do on your work.
So, in a very real sense, allocating and growing that wealth will become your new job. But taxes, required minimum distributions, and other obstacles can get in the way. Familiarizing yourself with the rules can help you keep your 401(k) going for as long as possible.
Contact a financial advisor today for personalized advice about your retirement accounts.
If you leave your employer, you can restructure your account
Perhaps the most pressing issue is that retirement triggers what the IRS calls a “divorce.” This simply means that you have left your employer for some reason, whether it be retirement, layoff, termination, or something else.
In a divorce, you can change how and where you keep your money, and you have several options for doing so. You could simply withdraw your 401(k) and roll it over to a standard portfolio, but this is a bad idea that would trigger high taxes. Instead, there are three common options:
Keep your 401(k)
Most employers allow divorced employees to keep their 401(k) as long as it maintains a minimum balance, typically $5,000 (or $7,000 as of 2024). If you like the structure of your plan and it’s an option, you can leave your money in the 401(k) as is.
You can no longer make new contributions to this plan once you retire – only withdrawals. You will also continue to pay 401(k) plan fees to the account administrator, which become more noticeable if they are not offset by new contributions. Finally, once your balance drops below the minimum, you can withdraw the remainder in a lump sum or roll it over to an IRA.
IRA rollover
If you want to manage your own investments or continue contributing to your plan, you can take your money out of your 401(k) and put it into an IRA and/or a Roth IRA. Any money you put into a Roth IRA is taxed at the time of conversion, so expect a hefty upfront bill but significant benefits later.
Unlike a 401(k), you can contribute to an IRA during retirement, but only with earned, taxable income. That means you can’t take portfolio gains and reinvest them in an IRA.
A financial advisor can help you develop an optimal pension strategy.
Annuity conversion
It is also common to convert your retirement portfolio into an annuity. Purchasing an annuity for life at the beginning of your retirement is a good way to secure a guaranteed, predictable income.
The catch is that annuities Are guaranteed. Your income will not fall, but it will also not rise to compensate for inflation. Ideally, this is a good option if the annuity generates enough money that you can reinvest some of it, so you can build a growth-oriented portfolio for the future.
Plan for RMDs and Taxes
Your required minimum distributions begin at age 73. For most people, this isn’t a factor, as they’ll have already taken income out of their portfolio. However, if you have other portfolios, a job, generous Social Security, or some other form of income, make sure you’re prepared for those withdrawals.
Also consider taxes.
The downside to a 401(k) is that you will have to pay taxes on your withdrawals. The IRS taxes you on the gains in your portfolio when you convert the assets to cash, and you pay those taxes at ordinary income rates, rather than the capital gains rates. This will reduce your effective income, and the size of your withdrawals will affect your Social Security benefit taxes, so budget accordingly.
Tax strategies are an important part of retirement planning. Talk to a financial advisor today to create a plan.
Allocate your money for safety and growth
In most cases, you’ll still need to plan for long-term investments. If you roll your portfolio into an IRA, you’ll need to manage your entire retirement yourself. With an annuity, you’ll need a plan for growth, and even if you keep your 401(k), you can choose to reinvest excess withdrawals into a private portfolio.
In all cases, it’s important to remember that retirement is just the next phase of your portfolio, not the finish line. You need to plan for more security than before, since you no longer have the income and time to replace portfolio losses. However, you also need to plan for some growth, since this money ideally needs to last 30 years or more. While it may seem unlikely that you’ll live to be 95 or older, you don’t want to beat the odds and run out of money in your later years.
Work with a financial advisor to find the right balance between those poles. You want a portfolio that keeps your money safe, but also maintains some momentum for a comfortable future.
Conclusion
Once you retire, you have several options for managing your 401(k), ranging from personally managing your money to leaving it where it is. Whatever you decide, think carefully, because managing your money during retirement is just as important as building that nest egg in the first place.
Tips for 401(k) Management
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The structure of a 401(k) is crucial. From company contributions to tax rules to risk management, it all matters. Don’t just leave it up to your plan manager, make sure you know what’s happening with your money.
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A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can schedule a free introductory meeting with your advisors to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid—in an account that isn’t subject to big swings like the stock market. The tradeoff is that the value of liquid assets can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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