If you’ve been part of the American workforce for any length of time, chances are you have participated in a defined contribution retirement plan like a 401(k).
And you wouldn’t be alone. According to the U.S. Department of Labor, more than 94 million of us participate in a defined contribution retirement plan. However, most people don’t know that they also have options.
You could decide that you are happy with the returns your current plan is giving you and leave your funds in that account. Or you could roll over your 401(k) into another investment vehicle that provides options for the funds you’ve worked so hard to save. Of course, all investment options come with risk, so it’s important to do your homework beforehand.
If you’re interested in your 401(k) options, here are some options to consider.
1. Take a distribution
If you need cash immediately, taking a lump sum distribution will serve that purpose. You will have cash in hand quickly and have purchasing power when you need it.
However, there are some downsides to taking a distribution. For one, you will no longer be able to enjoy the tax-deferred compounding that you would have realized if you left the funds in your account. Second, you will have to pay income taxes on your distribution for the year that cashed out. If you choose to take a lump sum distribution at age 55, you won’t pay a government penalty, but you also won’t be able to roll the money into another 401(k) or IRA without penalty unless you are at least 59.5 years old at the time of distribution.
2. Roll the money into an IRA
There are reasons you may want to consider rolling your 401(k) into an IRA.
For one, you will typically have more choices over investment vehicles and more control over the management of your retirement savings.
One downside of this option is that depending on what state you live in, IRA accounts may be unprotected in personal bankruptcy or lawsuits—401(k)s are protected. However, on the upside, if you have several different investment accounts, you may want to consider an IRA, because it will be easier for you to personally manage and you may qualify for discounts or breaks from sales charges depending on your balance. Be sure to consider fees and expenses when evaluating your options.
3. Take periodic distributions
Some 401(k) plans will allow you to take periodic distributions on a monthly or quarterly basis. It’s best to check with your plan to see if this is allowable, but if so, it could provide you with an additional income stream during retirement which you could invest in something of your choosing.
One important thing to consider with this option is how it will affect your tax position each year when it comes to filing. Check with a trusted tax professional or an attorney if you believe this option could result in negative tax consequences when it comes to filing your return. Also, remember that withdrawals before age 59 ½ will generally be subject to a 10% penalty tax in addition to income tax.
4. Consider using an annuity to fund other investments
Another way to have more freedom with how you spend your 401(k) money is to consider an annuity. It's true that annuity payments may not be inflation adjusted or offer the return potential of other investments. However, a regular income stream may allow you to enjoy more freedom in your retirement. Annuities are long-term investment vehicles designed for retirement purposes. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. For more information on 401(k) options or guidance with investment options, consider meeting with a trusted wealth advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk, including possible loss of principal.