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What Happens With Your 401(k) After Retirement?

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    You may have no idea what to do with the money you’ve saved in your 401(k) once retirement arrives. Nearly half of retirees intend to use their 401(k) as their primary income source during retirement, but they sometimes find that it’s not needed right away.  

    The best approach to using your 401(k) after retirement varies based on the individual. Those who start planning on how to use their retirement savings once their work career ends are well-equipped to get the most value out of them. 

    How a 401(k) Works After Retirement

    There are 401(k) plan rules that designate the age you are eligible to get your retirement funds and how they’re distributed. Here are a few facts to keep in mind:

    • The IRS lets people who retire after the age of 59½ begin taking money out of their 401(k). 
    • You are still eligible to withdraw funds from your plan before you turn 59½, but doing so will result in a 10% early withdrawal penalty in most circumstances. 
    • Those who are 55 and older but not yet 59½ may avoid the 10% early withdrawal penalty with their retirement plan. This applies if you have money in a 401(k) from an employer you just left.  
    • You can receive your retirement plan funds via lump-sum distribution or annuity or installment payments after you turn 59½. 
    • A lump-sum distribution gives you everything you’ve earned during your plan at once. 
    • An annuity or installment plan, on the other hand, allows you to receive incremental payments for a set period. 
    • You don’t need to start taking money from your 401(k) as soon as you retire. Some people prefer to work past the age of 59½, for example, and forgo plan distributions until later. 

    The IRS has required minimum distributions (RMDs) for those who forgo plan payments. It requires plan participants to start taking RMDs by April 1 the year after they turn 72. Some employers will allow participants to defer RMDs until April of the year after they retire. This exception does not apply, however, if you have maintained a retirement plan with a past employer. You’ll receive regular, periodic distributions when your RMDs begin, based on your life expectancy and account balance. You must always withdraw at least the minimum RMD amount each year, but you can always choose to take more. 

    3 Tips to Help You Get Started on Using Your 401(k) After Retirement

    couple taking a look at their 401k plan

    Don’t wait until retirement age to start figuring out how to use your 401(k). Review your plan’s payout policy, regardless of whether your retirement has arrived or is still a few years away. You can then use the following tips to determine how to use your plan after you retire: 

    1. Calculate Your Plan Fees

    Find out what fees you are paying as part of your plan. You can ask your employer what those are. Use this information to calculate how much these fees are costing you on an annual basis. Investment, administrative, and other plan fees should ideally hover around 0.2%. You may want to consider getting your plan funds or transitioning to an alternative retirement savings option if the fees approach 1%. 

    2. Compare and Contrast Your 401(k) to an IRA

    Your 401(k) was probably set up through your employer, and it may have gotten employer-sponsored contributions. Plans can sometimes have limited payout options, high administrative costs, or subpar investment choices, however; if you’ve got one of those, you may want to move your funds into an individual retirement account (IRA). An IRA is a tax-deferred retirement savings account you can set up and manage on your own. You can establish an IRA with a bank, brokerage, or investment firm and use the account to capitalize on stocks, bonds, and other investment options. 

    3. Explore Types of IRAs

    You can choose between Roth and traditional IRAs. A Roth IRA involves after-tax contributions, while you can generally use a traditional option to make tax-free contributions. There are income limits associated with both types of retirement accounts. It can be beneficial to leverage an IRA if you have multiple 401(k) plans set up. This allows you to consolidate all your retirement savings into a single account and control it however you choose. 

    4. Review Different Retirement Income Strategies

    You need to consider where your monthly retirement income will come from and how much of it will come from your savings. This income should exceed your expenses, so you’ll need to account for those too. Consider your housing, transportation, health care, food, travel, entertainment, and personal expenses. 

    You can also factor in Social Security. The Social Security Administration (SSA) offers a free retirement benefits calculator you can use to estimate your benefits based on your past earnings. 

    Keep in mind that you can delay your Social Security benefits. You can start receiving them at age 62 until age 72, and the monthly benefit rises for each month you delay. This means those who wait until age 70 can collect the highest monthly Social Security payout possible. 

    Common Pitfalls of Using Your 401(k) After Retirement

    You ultimately have three options for how to use your 401(k) after retirement: Receive your funds, keep them intact, or move them to a different type of retirement account. The ideal way to use your retirement plan depends on your financial situation and how you want to use your money, so consider all options carefully. 

    Failure to conduct a thorough review of retirement fund options can cost you hundreds or thousands of dollars. It can also cause you to face tax penalties (if you withdraw your retirement funds too early) or miss out on other potentially high-value investment opportunities. 

    Meeting with an independent investment advisor can provide an excellent starting point for getting the most value out of your 401(k). They can help you assess the pros and cons of the myriad ways to use your retirement funds. They can also produce a personalized plan to ensure you can accomplish your financial goals in retirement. 

    Contact an Expert With Questions About How to Use Your 401(k) After Retirement

    It’s natural to approach retirement with questions and worries about how it will work out. Bogart Wealth has built a skilled staff of independent investment advisors who can help you determine how to use your 401(k), so you can avoid running out of money once you retire.

    We have a long track record of helping our clients realize a secure and comfortable way of life after they’re done working. Contact our team today for expert advice on how to use your 401(k) after retirement.

    Work with a financial advisor who puts your needs first.

    Want to talk first? Call us at
    (866) 237-0121

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