Anticipating the moment when we can officially retire is something we all await eagerly! It will be a time to unwind, take it easy, and enjoy the fruits of our labor by accessing our well-deserved retirement funds.
We all look forward to the day we can finally call it a career! Time to kick back, relax, and collect our hard-earned retirement savings. But rushing into withdrawing your retirement funds without the best distribution method can prove costly.
When you retire, some employers require you to take the distribution of your 401(k) funds as soon as you separate from the company. Other employers, however, allow retirees to leave those funds in the company’s 401(k) plan, even after they’ve separated from the firm. Given the option – of leaving your money in the plan or rolling it into an IRA – which do you choose?
If you keep the funds in the 401(k), your money will continue to grow tax-deferred until you take distributions, but you will still be subject to the plan’s rules and investment options, which can be limiting.
An IRA rollover may be more attractive because you will have significantly more investment options while you continue investing and growing your assets tax-deferred. A rollover to an IRA will give you more control over when and how to invest your money and, to some extent, when you take distributions. And if you have multiple qualified retirement plans at several different employers, consolidating them into an IRA can make them easier to manage.
Another important factor is knowing the difference between a rollover and a cash distribution so you don’t trigger a huge tax bill. When you take the money out, if it is not reinvested into a qualified account within 60 days, you will be subject to income taxes. And, if you are under the age of 59 ½, you will also have to pay an early withdrawal penalty. The best solution is a trustee-to-trustee transfer, which will guarantee a proper rollover to an IRA without having to pay taxes or a penalty.
The decision to leave your 401(k) at your former employer, to roll over to an IRA, or to take a distribution depends on your specific financial situation – namely, your expected tax bracket the year you retire.
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If you have important retirement planning questions, schedule some time with our office to get the conversation started!
- Michelle Lee | (email@example.com) | 323.845.4434
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