401K strategies upon retirement
Posted on 01. Mar, 2010 by Global in Uncategorized
Do you know what you are going to do with your 401k once you retire?
Most don’t. Since more people are retiring earlier to pursue other careers or start small businesses, this is becoming a far more important topic than ever. Myths abound, which lead people to believe that they must immediately roll all of their retirement savings into a single IRA account or, at least, cash out of their 401k plan all at once. It isn’t true, and without the benefit of wealth education, few people know what their retirement plan options are.
Consider the following suggestions:
Suggestion Number One
If you were born before 1936 and have participated in your 401k for at least five years, it is possible that you qualify for an excellent tax strategy commonly referred to as a ten-year averaging. Such requires that you first withdraw your entire retirement savings at once. Upon doing so, you will figure your taxes on this amount by dividing the total by ten and then adding an additional $ 2,480 to the sum. Next, research the 1986 rate for single taxpayers and multiply that amount by ten. The resulting figure tells you how much you owe in taxes for your withdrawal using this option. If your 401k is less than $ 400,000 all told, you might save a lot on taxes by using the ten year average calculation.
Note the following: First, the IRS will only allow you to use it once, and second, you can’t roll over part of the 401k and use the ten year averaging on the remainder. However, the benefit to using this strategy on your complete withdrawal is that taxes were a lot less in 1986 than they are now and using the rate for single taxpayers from that year will offer you far more savings.
Suggestion Number Two
Some companies allow retirees to leave some or all of their money in an existing 401k plan. Find out your company’s policy on doing so if you believe this will be of benefit to you.
Suggestion Number Three
Roll your money over into one or more IRA accounts. You can do this as many times as you want in as many IRAs as you want. Take the time to investigate this option on your own or with a qualified financial planner to determine if doing so fits your retirement needs. This could be a good idea if your company will let you leave some money in your 401k and roll over a portion of the rest.
Suggestion Number Four
People who will be fifty-five years or older in the year that they retire may also consider cashing out of their 401k all at once or in part without penalties. Of course, ordinary taxes will be due on distributions, but, depending upon how much is in your account, this may be a smart option.
These suggestions are meant to get you to think about what to do with your 401k when you retire, but that said, they aren’t meant to be used instead of advice from a qualified professional. Bear in mind also that persons at least 70 years and 6 months of age are required to start withdrawing from retirement funds at this age. The exception is that funds in Roth IRAs or funds in a 401k with a company a person still works for, if that person doesn’t own more than 5 percent of that company.
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