This is why every worker approaching retirement should review the payout policy of his or her specific 401(k) account well before leaving work for good. This policy outlines the rules governing your withdrawals from your 401(k).
While some 401(k) accounts allow for installment plans that pay you on a monthly or quarterly basis, others require lump-sum distributions or have other regulations regarding the size and timing of distributions. Knowing exactly what to expect from your employerâ€™s 401(k) payout policy can help you plan your retirement income strategy.
While understanding the payout policy of your 401(k) is one portion of creating your retirement income strategy, there are several other issues you need to consider when deciding what to do with your 401(k) in retirement.
There are several IRS rules governing 401(k) distributions that you need to be fully aware of so you can stay on Uncle Samâ€™s good side.
Age 59 and a half is when 401(k) account holders are eligible to take qualified distributions, which means you can access money from your 401(k) account without having to pay the 10% early withdrawal penalty. You will still pay ordinary income tax on these distributions.
When you retire from the employer who holds your 401(k) account, you are no longer eligible to make contributions to that account. If you want to keep making contributions after retirement, you may roll over your 401(k) into an IRA or simply open a new IRA to contribute to while leaving your funds to grow in your 401(k).
However, you can only do this if you are still earning income. Since your IRA contributions must come from earned income, full retirement means no more contributions to retirement accounts. In addition, you must be under the age of 70 and a half to make contributions to a traditional IRA.
If you retire or lose your job at age 55 or later, you can still access your 401(k) funds without paying the 10% penalty. This can help any worker who is either involuntarily retired, laid off or who decides to retire earlier than they planned.
As of age 70 and a half, 401(k) account holders are required to take minimum distributions each year. The amount of the distribution is based upon your age and your 401(k) balance. One major benefit of 401(k) plans is that most plan administrators do this calculation for you.
Of course, just knowing the rules and requirements doesnâ€™t necessarily make it clear what you can and should do with your 401(k) once youâ€™ve reached retirement. Thatâ€™s why itâ€™s a good idea to familiarize yourself with the most common options for accessing your 401(k) funds in retirement:
No matter how you plan to access your 401(k) funds in retirement, itâ€™s important to plan ahead for your retirement expenses. There are several questions you need to ask yourself before you make the leap to retirement:
Making sure you answer these questions before you retire can mean the difference between a comfortable second act and finding yourself retired without enough money.
Figuring out exactly how to access the money in your 401(k) means understanding the legal requirements set by the IRS, the specific policies of your 401(k), and your retirement income needs. Knowing what to expect from each of these can help you find the right 401(k) distribution strategy for your retirement.