ISSUE #10
Managing Your 401(k) in Retirement

Like many Americans, you may have wisely saved for retirement in a 401(k) plan. You likely did a good job of accumulating your savings, but you may not have thought much about how to use those savings during retirement. Here are some important points to keep in mind about managing your 401(k) plan:

1. Tax Deferral — Your 401(k) contributions were made with pre-tax dollars, so the money in this account has never been taxed. Because of this tax deferral, you will owe income taxes on the money you withdraw from your 401(k) account. Your plan is required by the IRS to withhold 20 percent of each withdrawal for income taxes.

2. Withdrawal Rules — Once you reach age 59½, you may begin withdrawing funds from your 401(k) without penalty. Before that, you will pay a 10 percent early withdrawal penalty. You must begin your required minimum distributions by age 70½. If you fail to withdraw the minimum amount each year after age 70½, you face a stiff penalty. Make sure you consult with your financial adviser to plan your required minimum withdrawals.

3. Withdrawal Options — You have several options for managing your 401(k) once you retire. You may leave your funds in your 401(k) plan, if your plan allows it. You may transfer your 401(k) funds over into an Individual Retirement Account (IRA). A third option is to take a lump sum cash distribution. Some plans also allow you to annuitize your savings. This means that you receive a fixed annuity payment for life. You need to carefully consider each of these options before making a decision.

Option A: Keep Your 401(k) Account — Keeping your savings in your 401(k) account may be the easiest course of action, yet it may not be the best. The investment choices in your 401(k) may be quite limited, unlike an IRA. Another problem is that your account may be heavily invested in your employer’s own stock. This lack of diversification could cause a big drop in your savings, if your company’s stock goes down.

Option B: Rollover to an IRA — Once you retire, you may rollover your 401(k) funds to an IRA. This provides you with greater flexibility, as an IRA can invest in a wide variety of investment options. Make sure you request a direct custodian-to-custodian IRA transfer, so you can avoid the mandatory 20 percent withholding for income tax. Carefully review the investment options and fees in your new IRA account before making the transfer.

Option C: Lump Sum Distribution — While this option can seem attractive at first glance, it is usually not your best choice. A lump sum distribution is fully taxable, and such a large amount of income in one tax year may push you into a higher tax bracket. Even though 20 percent will be withheld for taxes, it may not cover your tax bill. Once your savings are outside of a tax deferred account, all interest and dividends will be taxed every year, losing one of the key advantages of a 401(k) account.

Option D: Annuitize — If you are offered an option to annuitize your 401(k) savings, you can receive a fixed annuity payment for the rest of your life. The advantage is that you cannot outlive your annuity. The disadvantage is that your payment will stay fixed, so it gradually loses purchasing power due to inflation. Carefully review your annuity options, which may allow you to include your spouse and guarantee payments for a certain period.

4. Your Beneficiary Designations — Your spouse is generally your beneficiary while you are married. Update your beneficiaries if your situation changes. Some people accidentally leave 401(k) funds to a former spouse. Consider leaving part of your 401(k) to a charity, which is tax exempt and will receive the full amount. Regularly review and update your beneficiaries to avoid unintended mistakes.

5. Getting Assistance — As you can see, the rules governing 401(k) plans are somewhat complicated. For most people, it makes sense to obtain professional assistance from a qualified financial planner, who can assist you in analyzing your options and making the best decision.

This publication has been prepared as an educational resource to help the reader identify areas of potential concern. The publisher is not engaged in rendering legal, accounting or other professional services. The information contained in this publication should not be acted upon without first obtaining the advice of a professional adviser. 2004 © Florida Philanthropic Advisors, LLC. Material may not be used without permission.

Our planned giving director, Paul Ditlevson, can be of tremendous service in helping you integrate your giving goals with your overall estate plan. He can also help you prepare to visit your attorney. You can reach Mr. Ditlevson by calling 419-289-5090 or by email to pditlevs@ashland.edu or regular mail at 401 College Avenue, Ashland, OH 44805.