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What to Do with Your 401(k): Managing Your Post-Retirement Assets

It can be staggering to consider how much Baby Boomers have accomplished. The Boomer generation changed American politics through their passion, altered our perception of the environment through their activism, and changed popular music forever through their tastes. After a lifetime of work, retirement is approaching and there are often financial decisions to be made. One of those decisions may be what to do with one or more 401(k) plans to which you’ve contributed during your working years. Let’s look at the available options so that you can determine what may work best for your personal situation.

Leave the Money in Your Plan

There are many 401(k) plans that allow you to keep your money in the plan after leaving your job with the associated company. You should consider, however, that many 401(k) plans have fewer than 15 investment options and as you enter the preservation and distribution phases of your life, you may decide that sort of investment platform no longer suits your needs.

Once you retire, you may also be less likely to keep a tab on any changes that your former employer may make to the plan. For example, that 401(k) plan could move to a new platform, perhaps more than once, which could lead to an entirely new set of issues that may affect you. Those issues could include new investments into which you're automatically allocated or new operational details related to distributions and rollovers. Moving the money into an IRA (discussed below) may eliminate some unknowns about where your money might end up.

Take a Lump-Sum Distribution

While this may strike some people, particularly those with smaller account balances, as an immediately gratifying option, it may not be in your best interest. Beyond draining a tax-deferred asset which may be used to generate future income, you are setting yourself up for a taxable event as distributions from 401(k) plans are generally taxed as ordinary income in the year they are taken. Depending on the amount of money in your plan, this decision could move you into a higher marginal tax bracket, further emphasizing the potentially negative impact of an immediate, full distribution from your 401(k).

Rolling into an IRA

IRAs can be used as a vehicle to consolidate old 401(k) plans to which you may have contributed during past employment. There are several potential advantages that exist with an IRA that may not apply to a 401(k). First, whereas 401(k) plans typically offer a somewhat limited selection of mutual funds, many IRA platforms offer hundreds, if not thousands, of different securities to choose from. This flexibility can be very useful for managing your future distributions and controlling your annual expenses. It can also lead to a broader ability to diversify your account, which could be particularly important if you have a large balance and desire a variety of asset classes and market sectors.

The potential cost reduction in moving a 401(k) plan to an IRA platform may also present a compelling reason to make the switch. Many 401(k) plans consist primarily of actively managed mutual funds, which may charge higher average annual expenses than other securities, including ETFs and individual stocks. Furthermore, you may be automatically subjected to transaction fees and other annual costs that could be avoided. It should be noted that IRA platforms are not always less expensive than 401(k) plans. Taking the time to assess your fee exposure both with your current 401(k) plan and with your IRA rollover options is an important exercise prior to moving your funds from one place to another.

It’s your retirement and your money. Taking the time to understand your various options when it comes to your 401(k) or other retirement accounts can help to ensure a stable, steady, and prosperous retirement.

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