HSAs and Retirement Planning

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.  

How you use your 401(k) in retirement will vary based on your individual circumstances, and thinking about an income strategy in advance can help. 

IRS rules for 401(k)s in retirement

The IRS has a few rules regarding how you can use the funds in your IRA. Here are a few to keep in mind.

  • When you turn 59 ½ you can start withdrawing funds from your IRA without a 10% early withdrawal penalty. Withdrawals are subject to federal and state income tax. (If you are older than 55 and recently left an employer, you may also be able to withdraw money from your 401(k) without an early withdrawal penalty.) 
  • You don’t need to start taking money from your 401(k) as soon as you turn 59½. You don’t even need to begin withdrawing money from your 401(k) when you retire.
  • You do need to begin withdrawing money from your 401(k) when you reach a certain age. The age at which you need to start taking required minimum distributions (RMDs) will vary by age, since Congress has updated the rules regarding RMDs several times in recent years. The amount you must withdraw also varies by personal circumstance. (For up-to-date guidance, check the IRS website.) 
couple taking a look at their 401k plan


Planning to use your retirement savings

The IRS isn’t the only consideration when planning how to use your 401(k) in retirement. You also need to review the terms of your plan. (Remember, 401(k)s are employer-sponsored plans, and terms are governed by your employer.)

Here are a few things to consider.

  • Plan fees
    Find out what fees you’re paying as part of your 401(k). (These are different than the fees associated with any ETFs or mutual funds you hold within the plan.) The lower the fee, the better. If your 401(k) comes with high fees, you may want to consider rolling your assets into a a different account.
  • Investment options
    Like administrative fees, the investment options available within your plans are determined by your employer. If you don’t like the options that are available to you, you may want to consider alternative accounts.
  • Distributions and payouts
    Your 401(k) may have restrictions around how you withdraw your money—in other words, whether you take a lump sum payment or withdraw your money in installments. Look into what restrictions your plan has, if any. If the options don’t meet your expectations around income in retirement, consider an alternative.

If you don’t like the fees, investment options, or payout terms of your 401(k), you may be able to roll the assets into another 401(k) or an individual retirement account (IRA). You may also be able to roll the assets into a Roth IRA. (A Roth conversion would require you to pay taxes on the entire conversion amount, but the money would grow tax-free once converted, and you wouldn’t pay federal income taxes on any withdrawals made in retirement.)

When determining whether to roll over your assets, and what type of account you might want to roll them over to, it’s helpful to think about your income needs and expectations in retirement. Consider your expected housing, transportation, health care, food, travel, entertainment, and personal expenses. 

You can also factor in Social Security and other potential sources of income. (The Social Security Administration (SSA) offers a free retirement benefits calculator you can use to estimate your benefits based on your past earnings.) Remember, you can delay your Social Security benefits to increase your payment amount. While you can start receiving benefits at age 62, the amount you qualify for increases each month until you turn 72. 

How an advisor can help

Missteps around how you use your 401(k) ahead of and in retirement can cost you thousands of dollars. Picking a plan with low fees, appropriate investment options, and minimal tax liabilities can help you get the most out of your retirement savings.

A financial advisor can help you navigate these questions and avoid a potentially costly mistake. If you have questions about how to use your 401(k) in retirement, or how to approach retirement planning in the years leading up to your retirement, set up a consultation with a Bogart Wealth expert

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