What to Do with Your 401(k) After Retirement
Key Points – What to Do with Your 401(k) After Retirement
- Two Options with What to Do with Your 401(k) After Your Retirement
- Taxation of a 401(k) or IRA
- What About RMDs?
- 6 Minutes to Read | 9 Minutes to Watch
Two Options with What to Do with Your 401(k) After Your Retirement
Are you wondering what to do with your 401(k) after retirement? Let’s find out. You have two options on what to do with your 401(k) after retirement. The simple one is to leave it in its existing plan. The other option is to roll it over to an IRA. There are pros and cons of both that Chris Rett is going to help us review.
What to Do with Your 401(k) After Retirement: Roll It Over to an IRA
Wider Choice of Investment Options
If you’re going to do a 401(k) rollover to an IRA, there are a couple of things to consider. First, one of the main reasons we talk to clients about rolling a 401(k) over to an IRA is to widen the opportunity of investment options that are available to you.
“401(k)s are great by design if you’re going to be investing in them. But oftentimes, they come with very limited investment options. So, opening the door to investment options is one of the major things that to look at if you have questions on a 401(k).” – Chris Rett
No Taxes If Funds Are Fully Transferred to an IRA from a 401(k) in 60 Days
Another question that Chris and the rest of our advisors get asked a lot is if there are taxes because of rolling a 401(k) over to an IRA. As long as you do a direct rollover within 60 days, there are no taxes owed. This is set by the IRS and there are no negotiations on that. So, don’t wait 60 days if you’re going to roll it over.
This is also the case for Roth 401(k)s. If you have a Roth 401(k) and you’ve been contributing to it, the same rules apply as you roll it over to a Roth IRA.
DO NOT Roll Over a Traditional 401(k) into a Roth IRA
However, one thing we want to be clear on is to never roll over a traditional 401(k) to a Roth IRA. There are major tax implications. Taxes will be owed.
Not All 401(k)s Have In-Plan Roth Conversions
That brings us right to our next point of what to do with your 401(k) after retirement. If you’re looking to do Roth conversions in your retirement, rolling your 401(k) to an IRA can be beneficial because not all 401(k)s offer the ability to do in-plan Roth conversions.
“If you’re looking to do Roth conversions in retirement, rolling over your 401(k) into an IRA may be the best choice.” – Chris Rett
Being Subject to the 59½ Rule
One of the drawbacks from this is that if you roll over a 401(k) into an IRA, the same rules of an IRA are set in place so that you technically aren’t supposed to touch it until 59½.
Using Rule 72(t) to Potentially Access Funds Before You’re 59½
That being said, one of the caveats or exceptions to that is utilizing Rule 72(t) from a 401(k) to an IRA if you need to access those funds prior to 59½. There are specific rules for 72(t), so you should contact a CPA or tax professional before doing that.
“As with everything else, there are a lot of moving pieces when you’re figuring out whether to leave a 401(k) or to it rollover to an IRA. Regardless, we always recommend you reach out and speak with a financial professional on these matters.” – Chris Rett
What to Do with Your 401(k) After Retirement: Keeping It in Your Employer Plan
Now that we’ve covered rolling your 401(k) over to an IRA, let’s look at keeping it in your previous employer plan. What are the pros and cons if that’s your approach on what to do with a 401(k) after retirement?
Limited Choice of Investment Options
We discussed how you can open the door to many investment options by rolling over your 401(k) to an IRA. In other words, there’s a drawback of leaving your 401(k) in the previous employer plan because there are oftentimes limited investment options.
The Rule of 55
One of the benefits to keeping your 401(k) in a previous employer plan is the IRS Rule of 55. After you turn 55 and leave your employer for any reason, whether it’s voluntary with retirement or involuntary like if there’s a major layoff, you can take distributions or withdrawals from your in-plan 401(k) with no additional penalties.
“This is a great workaround for any pre-retirement tax penalties. I’m talking about the 10% penalty added if you take distributions from an IRA prior to 59½. However, income taxes still apply on these distributions even after 55. So, make sure you’re withholding the proper federal withholding and any possible state taxes that apply as well. If you’re looking to supplement income from 55 to 59½, this could be a great tool for you.” – Chris Rett
It’s Age 50 for Public Safety Officials
There is one more important note regarding the Rule of 55. For public safety officials—firefighters, police officers, first responders, and air traffic controllers—it’s age 50, not 55. They get an additional five years of that.
Here’s the bottom line, though. Whether you leave your 401(k) in a previous employer plan or roll it over into an IRA, contact a CFP® Professional. Contacting a CPA would be a good idea as well.
Taxation of a 401(k) or IRA
Speaking of CPAs, let’s look at the taxation of a 401(k) or an IRA. Whether you leave your 401(k) in a previous employer plan or roll it over, taxation is going to be the same. You’re going to owe any applicable federal taxes depending on how much you’re taking out. And if state taxes are owed—depending out where you live—make sure you’re withholding those properly.
Roth Accounts Won’t Have Taxes After 59½
However, if you have a Roth 401(k) or have rolled into a Roth IRA, no taxes will be owed as long as you’re taking distributions after the age of 59½.
“Again, if you’re looking at Roth conversions or are curious about Roth 401(k)s, reach out to a financial professional because taxation in retirement or leading up to retirement is arguably more important than asset allocation and what you’re invested in.” – Chris Rett
What About RMDs?
The last thing to consider with what to do with you 401(k) or IRA after retirement is Required Minimum Distributions. RMDs are going to apply the same way in 401(k)s as they do IRAs.
The SECURE Act 2.0
For 2023, the RMD age has been pushed back to 73. If you decide to leave your 401(k) with your previous employer, if you’re turning age 73 this year or sometime in the near future, you are going to have to account for RMDs whether it’s in the 401(k) or an IRA.
At the end of 2022, the Federal Government passed the SECURE Act 2.0, which bumped the RMD age from 72 to those turning 73 starting in 2023. One goal of SECURE Act 2.0 is to bump the RMD age up to 75 by 2033. Also, starting in 2024, you will no longer need to take RMDs out of a Roth 401(k) if you left your Roth 401(k) with your employer.
If you retire from your company and you end up going back or staying on the payroll, you don’t have to take RMDs out of your existing 401(k) if you are going to remain employed there after RMD age. On a side note, if you are going to maintain employment there and opt to contribute to a Roth 401(k), some companies will start matching Roth contributions after tax as well.
“As it stands, employers are matching on a tax-deferred basis. But starting in 2024, they can match post-tax dollars as well and maximize that tax-free growth for you.” – Chris Rett
Do You Have Questions About What to Do with Your 401(k) After Retirement?
We hope this has been helpful for you if you’ve been wondering what to do with your 401(k) after retirement. If you have questions about what to do with your 401(k) after retirement, we can help. First, if you don’t have a financial plan, we encourage you to test out our industry-leading financial planning tool. It will back up Chris’s point about there being a lot of moving pieces in the retirement planning process, and that includes breaking down what to do with your 401(k) after retirement.
Having a financial plan can help give you more clarity and confidence with making those various financial planning decisions. To start building your plan for the comfort of your own home, click the “Start Planning” button below.
We’re Here to Help
Whether it’s while you’re building your plan or once you’ve completed it using our tool, we highly recommend reaching out to a CFP® Professional and/or to get their guidance on what to do with your 401(k) after retirement. Our CFP® Professionals and CPAs welcome any questions that you may have. To schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals and/or CPAs, please see our schedule below.
Thank you again for your time and for tuning into the Modern Wealth Management Educational Series. We hope that you have a great rest of your day.
Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.