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Managing your 401(k) in retirement every bit as important as managing it up to that point.
There are plenty of reasons for this but the big one is, you’re going to need this money for a long time. With good health and good luck, you could spend almost as much time in retirement as you did at work.
So, in a very real way, allocating and growing this wealth will become your new job. But taxes, required minimum distributions and other obstacles can get in the way. Familiarizing yourself with the rules can help you sustain your 401(k) as long as possible.
Talk to a financial advisor today for personal advice for your retirement accounts.
Leaving Your Employer Lets You Restructure Your Account
Perhaps the most immediate issue is that retirement triggers what the IRS calls a “separation.” This simply means that you have left your employer for some reason, whether it’s retirement, layoffs, resignation or anything else.
A separation allows you to change how and where you keep your money, and you have several options for how to do this. You could simply cash out your 401(k) and move it to a standard portfolio, but this is a bad idea that would trigger heavy taxes. Instead, three common options are:
Keep Your 401(k)
Most employers allow separated workers to keep their 401(k) so long as it maintains a minimum balance, typically $5,000 (or $7,000 beginning in 2024). If you like the structure of your plan, and if this is an option, you can leave your money in the 401(k) unchanged.
You cannot make new contributions to this plan once you retire – only withdrawals. You will also continue to pay 401(k) plan fees to the account administrator, which are more noticeable when not offset by new contributions. Finally, once your balance dips below the minimum, you can either take the remainder in a lump sum or roll it over to an IRA.
IRA Rollover
If you would like to manage your own investments, or if you would like to continue making contributions to your plan, you can take your money out of the 401(k) and put it into an IRA or a Roth IRA. Any money that you put into a Roth IRA will be taxed at the time of the conversion, so expect a large bill up front, but then significant advantages later.
Unlike a 401(k), you can make contributions to an IRA in retirement, but only with earned, taxable income. That means you can’t take portfolio gains and reinvest them in an IRA.
A financial advisor can help you set up an optimal retirement strategy.
Annuity Conversion
It’s also common to convert your retirement portfolio into an annuity. Buying a lifetime annuity at the start of your retirement is a good way to secure guaranteed, predictable income.
The catch is that annuities are guaranteed. Your income won’t decrease, but neither will it increase to offset inflation. Ideally, this is a good option if the annuity will generate enough money to reinvest some of it, letting you build up a growth-oriented portfolio for the future.
Plan for RMDs and Taxes
Your required minimum distributions will begin at age 73. For most people this is not a factor, as they’ll have already begun taking income from their portfolio. However if you have other portfolios, a job, generous Social Security or some other form of income, make sure to prepare for those drawdowns.
You can use SmartAsset’s RMD Calculator to estimate your RMDs and when they’re due to be taken.
Required Minimum Distribution (RMD) Calculator
Estimate your next RMD using your age, balance and expected returns.
RMD Amount for IRA(s)
RMD Amount for 401(k) #1
RMD Amount for 401(k) #2
About This Calculator
This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.
For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.
*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.
Assumptions
This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.
This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.
However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.
For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.
This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.
Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.
SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.
For example, you’ll put in your birth year, as well as the balance for up to three accounts, one IRA and two 401(k)s. You can also input the estimated annual return on those accounts.
The calculator will then give you the date by which your first RMD is due, as well as the amount that must be taken from each account.
Note: If you have multiple IRAs, the IRS allows you to calculate the RMD for each, and withdraw the total amount from just one or a combination of your IRA accounts. However, this does not apply to 401(k) accounts. You must calculate and withdraw a separate RMD from each 401(k) accounts.
It’s also a good idea to prepare for taxes.
The downside to a 401(k) is that you must pay taxes on your withdrawals. The IRS taxes you on your portfolio’s gains when you convert its assets into cash, and you pay those taxes at the ordinary income rates, rather than capital gains rates. This will decrease your effective income, and the size of your withdrawals will affect your Social Security benefit taxes, so budget appropriately.
Tax strategies are an important part of retirement planning. Talk to a financial advisor to build a plan today.
Allocate Your Money for Security and Growth
In most cases you will still need to plan for long-term investments. If you roll your portfolio into an IRA, you will need to manage your entire retirement personally. With an annuity, you will need a plan for growth, and even if you keep your 401(k) you may choose to reinvest excess withdrawals into a private portfolio.
In all cases, it’s important to remember that retirement is only the next phase of your portfolio, not its finish line. You need to plan for more security than before, because you no longer have income and time to replace portfolio losses. You also need to plan for some growth, though, because this money will ideally need to last 30 years or more. While living to 95 and beyond may feel unlikely, you don’t want to beat the odds only to run out of money in your later years.
Work with a financial advisor to find the right balance between those poles. You want a portfolio that will keep your money safe, but which will also keep some momentum for a comfortable future.
Bottom Line
Once you retire, you have several options for how to manage your 401(k), ranging from taking personal charge of your money to leaving it right where it is. Whatever you decide, make sure to think this through carefully, as money management in retirement is just as critical as building that nest egg in the first place.
401(k) Management Tips
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- The structure of a 401(k) is critical. From company matches to tax rules and risk management, it’s all important. Don’t just leave it up to your plan manager, make sure you know what’s happening with your money.
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