Dear Carrie: I'm 64 and about to retire. I'm starting to get my finances organized, and I'm wondering, should I leave my money in my 401(k) or transfer it to a different account? --A Reader
Dear Reader: Retirement planning can sometimes seem like a lot of work, but the more you get organized now, the more you can relax later on. You're wise to be looking at your choices ahead of time because when it comes to what to do with a 401(k) after retirement, there are some pros and cons to consider. And what you choose will have an impact not only on the potential continued growth of your retirement savings but also on your income taxes.
REVIEW YOUR BASIC CHOICES
Generally, there are four things you can do with a 401(k) when you leave your job. One in particular -- rolling over to a new employer -- doesn't really apply to your situation, but the other three merit consideration. Basically, when you retire you can:
--Take the cash -- At your age, there's no penalty, but there are tax consequences. Withdrawals from a 401(k) are taxed as ordinary income, so this could be a big initial hit. The Internal Revenue Service withholds 20 percent right off the top (this is mandatory) and any remaining taxes will be factored in when you prepare your return for the year in which you take the distribution. On the plus side, you'll have immediate access to your money. On the minus side, your savings will no longer grow tax-deferred. There is a 60-day window in which you can still choose to move your money into a tax-deferred IRA, but after that time, your only choice is to put it in a taxable account.
--Keep your 401(k) with your former employer -- This is probably the easiest and does have some benefits. You avoid income taxes and the mandatory 20 percent withholding; your money continues to grow tax-deferred; and you maintain the option of rolling it over, should you ever decide to go back to work. The main potential drawback is that your investment choices are limited to what's available in the plan. If you have 15 or so funds to choose from, that could be just fine. But if you're limited to three or four investment selections, you might be better off moving your money elsewhere. There also may be limitations on withdrawals and when and how you invest. Make sure you get the details.
--Roll it over to an IRA -- Like a 401(k), an IRA keeps your money growing tax-deferred. It also gives you the flexibility to choose the types of investments that you deem best. Plus, you can invest and access your money whenever you want, without going through a plan provider. Those are significant advantages. One possible drawback is that a 401(k) may have more legal protection from creditors than an IRA.