When you reach retirement, you’ll have five basic options for your 401(k):
You can leave your money in the plan. Some plans will allow you to remain after you leave your job. You’ll still be subject to the same plan rules. Ask the plan administrator if any special rules/privileges apply to retirees. If you don’t know who the administrator is, check with your human resources department or call the number provided on your last plan statement.
One advantage to leaving your money in the plan is that you can continue with your current investment options. You’ll also be dealing with familiar statements and there isn’t any extra paperwork involved. The main disadvantage is that your investment options are limited. You may also find that fees are higher than they would be with other options.
You can roll the money into an individual retirement account. In many cases you can transfer both cash and investments into a self-directed IRA account. From that point forward it’s similar to any IRA in that you’re responsible for all investment choices.
One advantage is that you’ll have the largest number of investment options available to you. Most self-directed IRAs allow you to invest in the full range of stocks, bonds and mutual funds. Some even allow for metals and real estate.
You can take a lump-sum distribution. You can choose to take all the money out of your 401(k) at once. One big check made out to you.
The main advantage is that you have the money available to you right away. That’s perfect if you need it to buy that retirement home. The biggest disadvantage of taking a lump-sum retirement distribution is the tax hit. Any withdrawal adds to your taxable income for that year. Spreading out the distributions also spreads out the tax liability. Taking a lump-sum could push you into a “wealthy” tax bracket and confiscate a significant portion of your money.
You can take periodic distributions. Some 401(k) plans will allow you to take regularly scheduled distributions of a set amount. Plans that allow for periodic distributions will generally allow you to change the schedule or the amount on an annual basis.
The main advantage to periodic distributions is that it mimics getting a paycheck, which is predictable income. It’s also good from a tax point of view. Regular distributions will keep you at a lower tax rate, leaving more in your pocket.
The biggest disadvantage is that you could outlive your income. If you take more than the account earns each year, you’ll gradually deplete it. Once that trend starts, it’s hard to reverse.
You can purchase an annuity. Most plans will allow you to buy an annuity from an approved insurance company with a portion or all of your 401(k) money.
Among the advantages is that an annuity can guarantee an income stream for a lifetime, so you can’t outlive your money. You can even buy one that allows for income to be paid to a surviving spouse. And, because the insurance company is responsible for investing the money, you have that burden lifted.