How To Claim The Money From Your 401(k) Once You Retire
There are a number of questions you might be asking yourself about your 401(k) and retirement. How will the money be dispersed? Can I receive a lump sum? How do I maximize what I take out of my account, and when?
If you’ve been mulling over these questions, you’re far from alone. The Wharton School of Business estimates that over the next 10 years, more than 10 million people will reach age 65. And a significant percentage of them will be looking to make their 401(k) accounts work for them in their retirement.
When You Can Withdraw The Money
Distribution options for 401(k) plans are governed by both tax laws and by the plan’s rules; some plans don’t offer all options that are available by law. It’s important to note that you can take money out of your 401(k) at any point in time, but most likely you’ll be required to pay a penalty.
If you choose to withdraw funds before you reach the age of 59 ½, you’ll pay a 10% withdrawal penalty, unless you leave your company after age 55. In that case, a lump sum distribution isn’t subject to the withdrawal penalty, although the money will be taxed.
You can choose to leave funds in your 401(k) account until later in life, but you must begin withdrawing part of the account when you reach the age of 70 ½. The amount of the required withdrawal will be determined by life expectancy.
Types Of 401(k) Distribution:
Lump Sum Distribution- A lump sum distribution is fast, but you’ll also quickly realize it comes with a few disadvantages. You’ll pay ordinary income taxes on the entire withdrawal amount, and you’ll no longer have a 401(k) account where money is growing tax free. Additionally, you’ll be subject to 20% withholding, which means the IRS will take 20% of the money distributed now and apply it to your following year’s tax bill.
Scheduled Distributions- Regular, scheduled distributions from a 401(k) aren’t subject to the 20% withholding that comes with lump sum distribution. You can likely choose from monthly or quarterly distributions, and the amount can be adjusted annually.
Roll The 401(k) Into An IRA- With this distribution option, you can withdraw money from the IRA whenever you choose, or decide to leave the money in the IRA account to grow tax free.
Leave The Funds In The 401(k) Account- Funds left in your 401(k) account will continue to grow tax free. Many retirees choose to spend taxable accounts first, saving their IRAs and 401(k) plans until they need the funds or they’re required by law to begin distributions at a certain age.
Annuity- An annuity can be purchased using part or all of your 401(k) money. With an annuity, you’ll be able to receive regular income for the rest of your life.
As with all of life’s major financial decisions, it’s important to seek information and advice from a tax professional or financial services expert. When it comes to money matters, it matters who you listen to.