401k money saving strategies upon retiring
Do you know what you will do with your 401k after retirement?
Most people don’t. With more and more Americans retiring early in order to pursue other careers or small business opportunities, this question is being investigated more than ever. Myths abound, which lead people to believe that they must immediately roll all of their retirement savings into a single IRA account or, at least, cash out of their 401k plan all at once. This, of course, is not true, but without the benefit of good wealth education, few people actually know what their retirement plan options are.
Consider the following suggestions:
Suggestion Number One
If you were born before 1936 and have participated in your 401k for at least five years, it is possible that you qualify for an excellent tax strategy commonly referred to as a ten-year averaging. Such requires that you first withdraw your entire retirement savings at once. Upon doing so, you will figure your taxes on this amount by dividing the total by ten and then adding an additional $2,480 to the sum. Next, research the 1986 rate for single taxpayers and multiply that amount by ten. The resulting figure tells you how much you owe in taxes for your withdrawal using this option. If your 401k value is less than $400,000 in total, you may find that you can save a lot on taxes by using this ten-year averaging calculation.
Two things to note if you plan on using this strategy: First, the IRS will only allow you to use it once and, second, you can’t roll over part of your 401k and use ten-year averaging on the remaining amount. However, the benefit to using this strategy on your complete withdrawal is that taxes were a lot less in 1986 than they are now and using the rate for single taxpayers from that year will offer you far more savings.
Suggestion Number Two
Some companies allow retirees to leave some or all of their money in an existing 401k plan. Find out your company’s policy on doing so if you believe this will be of benefit to you.
Suggestion Number Three
Roll your money over into one or more IRA accounts. You can do this an unlimited number of times in as many IRAs as you like. Take the time to investigate this option on your own or with a qualified financial planner to determine if doing so fits your retirement needs. This might be an especially good idea if your company will allow you to leave some money in your 401k and roll over just a portion of the rest.
Suggestion Number Four
People who will be fifty-five years or older in the year that they retire may also consider cashing out of their 401k all at once or in part without penalties. Of course, ordinary taxes will be due on distributions, but, depending upon how much is in your account, this may be a smart option.
While these suggestions are meant to give you guidance on what to do with your 401k account when you retire, they should not be used in lieu of or to substitute the advice of a qualified professional. Also, do keep in mind that senior citizens age seventy and six months are required by law to begin taking money from all retirement accounts at this time. The only exception to this is money in a Roth IRA or if money is in a 401k with a company that still employs the person, provided that the employee does not own more than five percent of the company in question.