Navigating Your 401(k) After Retirement: The Three Main Options

"What do I do with my 401(k)?" You've worked hard and saved diligently into your 401(k), but now that retirement is here, what comes next for that nest egg? Don't make a costly mistake by defaulting to a choice that could trigger a huge tax bill! In this episode, we break down the three most common options for your 401(k) when you leave an employer—from leaving it in place to a tax-free rollover—and reveal the two "magic ages" that determine when you can access your money penalty-free and when the government requires you to start taking distributions. Find out which option gives you the most control and the widest range of investment choices for a thriving retirement.

Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Branch phone: [phone].

What is Retirement With/On Purpose?

A podcast designed to help retirees and those nearing retirement navigate finances and life planning with expert insights from financial advisor Trevor Lawson. Tune in for practical strategies and inspiring ideas to ensure your retirement years are purposeful, fulfilling, and truly your best chapter yet.

*Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Branch phone: [phone].

Trevor Lawson: [00:00:00] Welcome to The Retirement With and On Purpose Podcast. I'm your host, Trevor Lawson, and this show is all about helping you not just reach retirement. But truly thrive in it. You've put in the work. Now let's make sure you can enjoy every moment to the fullest.
Today's episode is all about 4 0 1 Ks, and more specifically, what are our options with our 401k upon retirement? So as many of you listeners may know. Most of the clients that I work with are either approaching retirement or have already retired, but one of the biggest questions on their mind is oftentimes, what do I do with my 401k?
You know, I've been working, I've been saving in it. What, what happens when I retire? So today we're gonna talk all about that [00:01:00] and in essence, there's, there's just a couple of options to consider. So there's, it's not something that, um. It is going, it should cause too much anxiety or concern. There's really only a handful of options, one of which is to just leave it like it is inside the 401k plan.
By doing that, the investments will, will stay the same, and it's going to continue to kind of ebb and flow with how, with the market based on how your, your underlying investments inside your account. Perform. And then if you go that route, when you're ready to start taking income, you'll contact your your 401k plan administrator and let them know that you're, you know, you either wanna start receiving.
A paycheck monthly, or you want to, you want to take money out on a infrequent basis, they will kind of work with you to, to start those, those distributions. That's one option. Just kind of leave it like it is, and then you'll work with your 401k provider on a, a withdrawal [00:02:00] strategy if you do leave it there and you don't necessarily need income.
Um, just keep in mind when you reach age 75 now for, for most people, 73 for, for, um. Some, but 75 for others, you'll be forced to start taking out distributions in the way of a required minimum distribution. Um, and there's no way around that, regardless of what you do with your 401k. But option one, leave it there.
Um, and then just kind of take it as, as you need it. Option two. Would be to roll it into some type of IRA account, an IRA being an individual retirement account. And the reason why people will oftentimes consider that is because they get access to a lot more investment options. So inside your 401k, typically you're limited to just a handful of, of investment funds available in, in your specific 401k.
When you roll it into an IRA, the entire investment galaxy oftentimes opens up to you. So you get access to more investment [00:03:00] options and then many folks will partner with some type of, um, investment advisor or advisory team to help kind of actively manage that retirement account. So the benefits there are access to more investment options.
Having the ability to work alongside a, a, a investment advisor who can help kind of actively manage that account on your behalf as far as the distributions go, you know, with an IRA, you can take it as needed or you can set up some type of systematic withdrawal plan where you're receiving disbursements on a, on a regular basis.
So that's a a second option. Is to roll your 401k over into an IRA and that rollover process when going from a 401k to an IRA is, is non-taxable. So you don't have to worry about paying taxes. Um, on that, that rollover a third option for some people. And you, this is not. Very common. And oftentimes [00:04:00] it's, it's discouraged for reasons you'll we'll talk about in a minute.
But you can roll or, or you know, completely withdraw all the money in your 401k. So you retire and you withdraw all that money and you just simply put it in your, your checking your savings account. That's usually. Strongly discourage for the simple reason that when you take that money out, it's gonna be taxable.
And if we take out a large lump sum at once, it could jump us up in, into, you know, two or three tax brackets above where we currently are. So by doing that, you're oftentimes paying a lot, you're giving a lot more of that 401k away in, in the way of taxes than you would by, you know, systematically taking money out over time.
But nonetheless, it's, it's your money. You can, you can take it out if, if you need to. Those are. Three options, really leave it like it is and just kind of take it as you need it or set up some type of ongoing disbursement plan, roll it into an IRA, or kind of take money out, put it in your checking or savings [00:05:00] account.
They each have different pros and cons, but those are a. Those are three common considerations. Finally, I'll just mention that you know, the, the, there's really two magic ages when it comes to 401k planning, one of which we've already covered. The other is 59 and a half. So most of the time with 401k, um, in retirement plans, 59 and a half is the magic age at which you can start taking money out free and clear of any type of early withdrawal penalty.
So, um, we generally discourage folks from, you know, from withdrawing from their 401k unless they absolutely need to prior to age 59 and a half, because you incur an early withdrawal penalty when you do take money out prior to that age. But after 59 and a half, you are free and clear of, of that, that early withdrawal penalty and can do as you wish with, with the monies.
Um, and then again, that other magic age I mentioned before. It's 75 now for most people. 73 still for some, that's the age at which you're required [00:06:00] to start taking money out on a consistent basis from your retirement account. With a caveat there, if you are still working, um, at that age, you're not necessarily required to, to take money out of your, your plan, but most people at that point have retired.
Therefore are required either at age 73 or 75 based on their birth year to start taking those required distributions. I hope you found this episode helpful. Uh, next time we're gonna talk more about the 401k, but more specifically, what happens to our 401k when we're no longer here? What happens to our 401k when we pass away?
Stay tuned and take care.
Thanks for tuning in to the Retirement With and on Purpose Podcast. I hope you're walking away with new ideas and a fresh perspective on how to make the most of your retirement journey. And remember, retirement isn't the end. It's your time to live with purpose. Until next time, I'm Trevor Lawson. [00:07:00] Here's to a fulfilling and thriving retirement.