What should you do with a 401(k) when you retire?

Aug 28, 2015
Author: Scott Hanson

retirement_borrowingI’m often asked what should be done with a 401(k) when someone retires. Should it be left with the employer? Should it be moved someplace else?

My answer is, that it all depends.

The 401(k) is an excellent retirement preparation vehicle. The money is taken from your paycheck before taxes, lowering your taxable income while giving you a way to save money before you have a chance to spend it. And when you consider that many employers offer a “match,” sometimes as much as 6%, you are essentially getting free money to help you prepare for the future. All that, and your savings grows tax deferred for years or even decades.

At retirement, lots of people choose to move the money from their 401(k) into an IRA. Others elect to simply leave the money in the 401(k), as there are times when that might be the best option. First, it’s a vehicle that you are familiar with, and, second, the administrative costs are typically low. If you’re confident in your ability to manage your investments, there are worse options than leaving the money where it is.

Now, upon retiring, some people end up receiving income from various sources. Maybe their spouse has a pension, they have Social Security, there might be a 401(k), and perhaps there’s some rental property income or even additional savings.

Once retirement hits, realizing that they can’t afford to make a mistake, some people seek professional investment advice. The first step is often to move those 401(k) dollars out into an IRA.

IRAs are flexible, but they are likely to have higher costs than those associated with most 401(k)s. The tradeoff is that many people find that those costs are offset by the structured plan that a qualified, credentialed advisor can create.

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