In 1978, 401k plans were enacted into law and is one of the most popular retirement savings options for working Americans. These plans, along with similar defined contribution plans, have many attractive benefits like automatic payroll deduction for contributions, employer match arrangements, and the ability to defer taxes on the monies in the account.
As millions of baby boomers retire, most are wondering, “What am I supposed to do with my 401k?” It’s an important question because most participants have a majority of their accumulated retirement assets in this type of government-sponsored retirement plans.
The common answer is to move or rollover your 401k into an IRA account. These IRA monies can be invested or deposited in savings accounts, CDs, bonds, annuities, mutual funds, stocks and even real estate. Given the array of choices, it boils down to what you are wanting this IRA account to do for you.
Where to Start?
For example, your liquid monies (not 401k or IRA) are the most flexible assets in retirement for spending because the IRS has limited control on them, but your qualified assets, including 401ks and IRAs are significantly less liquid. A recent client asked, “How is my $250,000 IRA not liquid? I could spend it if I wanted to.” The client understood that no taxes had ever paid on these funds.
Withdrawals from qualified retirement accounts count as income. In other words, the client’s $250,000 IRA if used in full as liquid money, put him in the highest income tax bracket when considering the other money he needed to pay the bills. He would have to pay over 45% in taxes on the $250,000 and on his other retirement income. He quickly agreed his IRA money was not “liquid” like the money he has in bank accounts. Because of this dynamic, retirement monies have one real purpose: To be used as retirement income.
401ks and IRAs?
We believe your 401k or IRA monies should be withdrawn as income near the start of retirement. If one does not “need” the money, then it’s okay to pay the taxes at a lower tax rate and save the money. The idea is to filter the money through the IRS in a way that offers flexibility during retirement while minimizing the negative consequences of taxes and for beneficiaries in the future.
One of the most effective ways of withdrawing money from 401k plans and rollover IRAs is through the use of phased withdrawal strategies, laddered annuities, and the use of annuity withdrawal benefit riders. Each of these options allow for a more effective withdrawal rate than the common approaches above, without the risks associated with the alternatives, and guarantees against running out of money before death. The goal is to create the largest stream of income over the longest period of time with the guarantee against ever running out of your money.