Ready to Use Your 401(k)? Unlock Your Possibilities Here

Close-up of hands with a coffee mug and laptop, symbolizing the transition to managing retirement funds. — Relax with a steaming mug and laptop as you begin to enjoy the well-deserved benefits of your retirement savings.

Time To Benefit From That 401(k) You’ve Been Stashing Away!

Saving for retirement may not have always been at the top of your priority list, but now that you’re nearing retirement, you’re probably glad you did.

Because your 401(k) might be a big chunk of your retirement savings, it’s crucial to weigh the pros and cons of your options and find the one that fits YOUR specific needs.

Make an informed decision:

Find out the 401(k) rules
Compare fees and expenses
Consider any potential tax impact

So what should you know about 401(k)s to optimize yours? And what should you do with it when you switch jobs or retire altogether? We’re here to offer you the BEST advice.

Keep reading to find out more!

Ask Your Company for a Better Plan

This is the FIRST thing you should be considering before you even near retirement. As an employee, you should be bold in asking your employer for better 401(k) options if you are unsatisfied.

All employers who offer a 401(k) retirement plan have a fiduciary responsibility to all their employees. The company must create a plan with fair fees and features that will allow its employees to save for retirement effectively.

Many businesses, especially the smaller ones, don’t have a 401(k) specialist on their staff, so they might not necessarily be getting the best deal in the marketplace.

Quick Tip: You can contribute to your 401(k) in different ways. Pre-tax contributions give you that tax break up front, which is probably better if you’re a higher earner. Roth contributions, where the taxes come out when you withdraw the funds, are probably better for those in a low marginal tax bracket.

A senior professional smiling while reviewing financial documents in a bright, modern office. — A smiling professional reviews her documents in a bright office, ensuring her matching compensation package reflects her true value.

Are You Accepting Matching Compensation?

If you’re lucky enough to get employer matching contributions for your 401(k), you should definitely jump at this chance because it’s essentially free money going toward your retirement goal.

Your 401(k) plan is essential because it allows you to save and invest in your retirement plans and offers tax advantages by doing so. All the funds that are in your 401(k) plan grow tax-deferred until you withdraw them.

If an employer offers matching contributions, consider them as part of your compensation and don’t waste them. But you want to ensure you’re contributing the right amount in order to benefit from it.

Your best bet is to look up the rules for your plan, ask the HR team, and make sure you contribute enough to receive the full benefit of the employer match.

For example, if your company matches 50% of employee contributions up to 6%, you need to contribute at least 6% of your income to the plan to receive that 50% match.

A senior man sitting contentedly in a home library, representing the stability of keeping retirement funds in place. — A man relaxes in a leather armchair among his books, enjoying the security of his former company retirement plan.

Hold your 401(k) With Your Former Company

…Now that you’ve finally retired, what are your options?

Most employers, not all, will allow you to keep your retirement savings in their plans even after you leave. Talk to them and see if this is the case for you.

Benefits:

Your money has a chance to continue growing, tax-deferred.
You can take out penalty-free withdrawals if you leave your job at age 55 or later.
Many offer lower-cost or unique investment possibilities.
Federal law provides all-around protection against any creditors.

Drawback:

If you have fewer than $5,000 in your plan, the money might be automatically sent to you or an IRA for you.
If you decide to keep the money with your former employer, you won’t be able to add any further cash into the account or take out a 401(k) loan.
Withdrawal options might be limited. For example, you might not be able to take out a partial withdrawal. You might have to take the entire balance.
After reaching age 72, you’ll have to take annual required minimum distributions from a traditional 401(k).

If you hold appreciated company stock in the workplace savings account, evaluate the potential impact of net unrealized appreciation before deciding between a rollover or some other alternative.

Roll over the money into an IRA

Choose a retirement account that will allow you to move money from your former employer’s plan into an IRA. You can open up an IRA with a bank or brokerage firm. However, be sure to research fees and expenses when choosing an IRA provider because it varies.

Benefits:

Your money gets a chance to continue growing tax-deferred.
If you’re under the age of 59 and a half, you can withdraw your money penalty-free for a qualifying first-time home purchase or a higher education expense.
You might get a broader range of investment options than those available in your former employer’s plan.

Drawback:

After reaching age 72, you’ll have to take annual required minimum distributions from a traditional IRA each year, even if you’re still working.
Federal law offers more protection for your money in 401(k) plans than in IRAs. However, some states provide specific creditor protection for IRAs as well.

Cash-out

Taking the money out of retirement accounts entirely should be avoided unless your immediate need for cash is vital and you’ve run out of any other options. The effects will vary depending on your age and tax situation.

If you withdraw from your 401(k) before the age of 59 and a half, your money will typically be subject to regular income taxes and a possible 10% early withdrawal fine.

An early withdrawal fine doesn’t apply if you’ve stopped working for your employer in or after the year you reached the age of 55 but are not yet age 59 and a half.

This exception doesn’t apply to assets that have been rolled over into an IRA. If you’re under age 59 and a half and MUST access your money, you might want to think about withdrawing only what you need until you can find some other sources of cash.

That’s only possible if your former employer will allow partial withdrawals or if you roll over the account into an IRA.

Speak To a Financial Advisor And Pick The Best Choice For YOU

Whatever you decide to do, make sure you talk to a financial advisor first. An advisor who is in your corner will talk to you about all of these options and let you make an educated choice.

When you’re trying to decide what to do with your old 401(k), there might be factors to consider that could be unique to your own personal situation. This means the best choice will be different for each individual.

One thing to keep in mind is that the rules among retirement plans vary, so it’s essential to find out your former employer’s rules and the rules at your new employer if you have one.

One thing’s for sure, compare the fees and expenses associated with the accounts you’re thinking about choosing. If you find it confusing or get overwhelmed, talk to a financial professional to help with the decision-making process.

We hope this post has helped you in your decision-making process. Another great source of information is the IRS website where you can get the 411 on all things related to 401(k)’s. Be sure to choose whatever option is right for you!
But while we’re on the subject, we’ve got many other articles that will help you ease into your retirement. Our recommendation? 5 Best Spending Strategies in Retirement