If you’re like many Americans, your 401(k) may be your single largest retirement asset, and it could be your most important one, too. After all, your retirement may last decades, so it’s vital to ensure your money does as well. What you decide to do with your 401(k) after you retire can be a major factor in how long those funds last.
Understanding the options for your 401(k) and the potential advantages and drawbacks of each one can help enable you to make the best decision possible for the future of your retirement. Read on to discover three potential options and their pros and cons, which may help you determine a plan for your funds that’s right for you.
Strategy #1: Cash out the account.
You can choose to close your account and take your 401(k) funds in a lump-sum cash distribution. This option may be appealing, because it gives you a large chunk of money at one time. You can do what you like with that lump sum. Many people enjoy this kind of flexibility.
Unfortunately, there are a few reasons why cashing out your 401(k) may be a bad idea. When you cash out the account, the money you receive is fully taxable. If the distribution is substantial, you could get pushed into a higher tax bracket. Additionally, if you’re under the age of 59½, you will have to pay an early distribution penalty.
The other drawback to cashing out your 401(k) is that you lose out on the future tax-deferred growth that would come with leaving your funds in the plan. Tax deferral can be a valuable tool in helping your funds grow and last through your lifetime.
Strategy #2: Keep your account as it is.
You’re not required to do anything different with your 401(k) once you retire. If you like, you can choose to simply leave the funds in your employer’s plan.
Why would you keep your funds in the plan? Simplicity. When you’re familiar with your current plan and how it works, you may just feel more comfortable leaving things the way they are. This can be especially true if you like the investment options your plan offers and want to keep them. By leaving your funds in the 401(k), you also avoid having to pay the taxes or early distribution penalty that would come with cashing out the account.
However, there are reasons why it may be a bad idea to leave the funds in the 401(k) plan. If you have other IRAs and investment accounts, it may be difficult to manage a cohesive investment strategy across multiple vehicles.
Also, you may have limited investment options in your employer’s plan, so it may be more beneficial to seek out alternatives that could better align with your risk tolerance. Remember, as you get older and start to distribute funds from your 401(k), you may find that your tolerance for risk has changed.
Another drawback is that it can potentially mean a less-than-ideal organization of your financial affairs. It’s one more account that your beneficiaries will have to track down when you pass away, which creates the possibility that they could miss it.
Strategy #3: Move your 401(k) funds into an IRA.
Finally, you could also choose to roll your 401(k) into an IRA. This process is commonly referred to as an IRA rollover.
The benefit of an IRA rollover is that it enables you to get your funds out of the 401(k) plan but avoid a taxable distribution or early penalties. The IRA may give you more control over your funds and the advantage of a wider range of investment options.
Also, IRAs have the same tax-deferral features as a 401(k). That means you can continue to benefit from tax-deferred growth inside the IRA.
If you want to learn more about IRA rollovers and other potential options, let’s start the conversation. Give us a call at Fenton Financial Services and speak with one of our professionals today. We look forward to connecting with you.
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