What to Do with 401(k) at Retirement?

by Tim Plaehn

During your working years, your 401(k) account is a benefit for saving money and lowering your income tax bill. Once it is time to retire, the money accumulated in your 401(k) may be used as your primary or supplemental retirement income. What you decide to do with the money depends on how you want the money to be distributed in your retirement years and how you would like the money to be managed.


Keep several important points in mind when deciding what to do with your 401(k). Any withdrawal or distribution you receive from the account will be taxable income. The amount of withdrawals should be coordinated with your other sources of taxable income. How important is the 401(k) money to your retirement income and lifestyle? If you are counting on the money for a certain amount of income it must be managed to produce that income and also last as long as you live. Include the use of your 401(k) money in an overall picture of your financial situation in retirement.

Leave the Money with Your Employer

When you retire, there is no requirement to transfer the money out of your employer's 401(k) plan. The plan administrator can provide the services you need in retirement, such as periodic withdrawals and income tax withholding. The decision to stay with the 401(k) administrator is based on whether you are satisfied with the investment options and returns and whether it is easy to communicate with the administrator to get things accomplished. If you decide to leave the money in the 401(k), review the investment choices and make adjustments to your allocation based on your needs during retirement. For example, after retirement you may want a higher proportion of bond investments to provide interest income and less stock market exposure to avoid a big loss if the market drops suddenly.

Direct Rollover to an IRA

To withdraw the money from the 401(k) and not be liable for a large amount of income tax, the money may be transferred to an IRA account using a direct rollover. To roll over into an IRA is a good option if you have several retirement accounts you wish to combine into a single account. Using an IRA allows you to manage your own investment choices. The IRA can be set up with a discount brokerage company if you want to invest in stocks, bonds and exchange-traded funds with your retirement money. IRA accounts are available from a wide range of financial services companies providing different investment choices. Using an IRA gives the most flexibility to handle your 401(k) retirement funds.

Use A Money Manager

If you are not comfortable managing your own investments, it may make sense to have a professional money manager handle your retirement money and select the investment choices. An investment manager will take your goals for the 401(k) money and manage the funds to meet those goals. The manager should also handle the administrative tasks of a retirement account -- such as the rollover -- setting up withdrawals and tax withholding. Using a money manager provides you with someone you can sit down with on a regular basis and discuss the performance of your retirement funds and make adjustments to meet any changes in your income needs.

Retirement Annuity

An annuity is an insurance product that provides a regular income you cannot outlive. The life insurance company that issues the annuity guarantees the payments for as long as you live. You may buy an annuity with all or a portion of your 401(k) money to set up a guaranteed retirement income. Insurance companies offer a range of income choices, such as guaranteed minimum payment periods if you die early or survivor income benefits. An annuity purchase is an irrevocable choice, so all factors and the consequences should be understood before using your 401(k) money to fund an annuity.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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