By: Clay Wyatt
If you are age 59 ½ or older, you have cleared a major hurdle in the 401(k) game. Those under this age have a host of rules that impede them from making 401(k) withdrawals without penalties. However, after age 59 ½, you will have a much easier time accessing your retirement savings. So, how can you go about making 401(k) withdrawals?
At this stage in your life, your 401(k) withdrawals will be taxed as ordinary income. You may take distributions at any time at this point. However, if you have other means of income, you may opt to leave your funds untouched up until the time you turn 70 ½, when additional rules kick in and you must take a required minimum distribution. At that point, depending on your plan, you must either withdraw the full amount or begin taking periodic distributions based on your life expectancy. Talk to your plan administrator or a qualified investment advisor if you plan to take this route.
You also have the option of rolling your funds over to another 401(k) or IRA plan. This can be done on a tax-free basis as long as you either roll the money directly to the new plan (without ever actually possessing it yourself) or by obtaining a check from your previous plan and depositing it into the new plan within 60 days. IRA plans typically offer greater personal control over the assets than 401(k) plans , so that is something worth looking into when deciding whether or not to roll your 401(k) into your new employer's plan or into an IRA. In any case, you will still have to pay taxes on your 401(k) withdrawals (or IRA withdrawals).
As mentioned, you can make 401(k) withdrawals any time after age 59 ½. However, it is important to keep in mind that your retirement funds must last the rest of your life. If you have other sources of retirement income, consider the return on them as compared to your 401(k) before making any 401(k) withdrawals. For example, if you have a savings account earning 1 percent, it is obviously best to use those funds first instead of making 401(k) withdrawals, as the stock market averages 10 percent in gains annually. The order in which you withdraw funds is important in determining your retirement discretionary income.The present tax situation must also be considered. With a seemingly endless amount of rules, regulations, and the legal and financial consequences of making a mistake, it is best to consult a qualified retirement consultant before you make any decisions regarding 401(k) withdrawals. Running out of money too early or having Uncle Sam on your back will cause a lot of problems if you are not careful!
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions