global Tax Did You Retire? How to Handle Your 401(k) April 11, 2022 Before you can fully enjoy retirement, you will want to read up on what to do with your 401(k) funds. We explore three basic options here. You have been scrupulous about building your 401(k) account over the years. Now, at long last, you are ready to retire. What should you do with those funds to enjoy your best life and minimize your tax bill? You have three basic options. 1. Stay Put As long as your account balance in your employer’s 401(k) plan is at least $5,000, you can leave the money in the plan. This route has several potential advantages. For example, the fees may be smaller than you would incur if you transferred the funds to an individual retirement account (IRA). That is particularly likely if you work for a large employer that has leveraged its size to negotiate lower pricing for its plan participants. But even smaller employers often have some low-cost offerings. In addition, some employer plans allow participants to take loans. They also might feature proprietary or just preferred offerings not available in an IRA. If you are retiring early but after age 55, you can take withdrawals from a 401(k) before you reach age 59.5 years without the 10% early withdrawal penalty. (But you will still have to pay ordinary income taxes on such withdrawals.) Beware, there is a potential downside to leaving your money in the 401(k) plan and want to use to the funds as a monthly income stream: Although some plans let you set up regular withdrawals or installment payments, many allow only lump-sum distributions or limit withdrawals to quarterly or annual distributions. 2. Roll Over to a Traditional IRA Many people choose to cut ties with their former employers and roll over their 401(k) funds into a traditional IRA. This option has some benefits to consider, too. For instance, IRAs typically have flexible payout options, including installment payments. An IRA may have an annuity option, too, which is less common with 401(k)s. From a tax planning perspective, you can have taxes withheld when you take IRA distributions — or pay later when you file your taxes for that year. By contrast, 401(k) plans are required by law to withhold 20% for federal income taxes. IRAs also generally provide many more investment options than 401(k) plans. Most employers offer no more than a few dozen choices, while IRA owners can pick from thousands of funds and securities. Finally, you can consolidate multiple retirement accounts in an IRA and end up with a single required minimum distribution (RMD) you must satisfy every year. If you stay in the 401(k) plan and also have a traditional IRA, you will need to take separate RMD distributions for each account. Important Note: If your 401(k) includes publicly traded stock in the sponsoring company, you might want to transfer it to a taxable brokerage account, rather than an IRA. The net unrealized appreciation (NUA) — the difference between the stock’s value at acquisition and its value when transferred to the account — will be subject only to capital gains tax when you sell the stock. The higher ordinary income taxes will apply only to the tax basis (generally, the acquisition value). And you can transfer the balance of the 401(k) to an IRA. If you simply transfer company stock to an IRA, it will be subject to the RMD rules. Moreover, future withdrawals will be taxed as ordinary income. There are three very specific requirements to meet the requirements for the NUA rules: The employer stock must be distributed in-kind. The employer retirement plan must make a “lump sum distribution”. The lump-sum distribution must be made after a “triggering event”. These are (a) Death, (b) Disability, (c) Separation from Service, or (d) Reaching age 59 ½. 3. Cash Out Cashing out your 401(k) at retirement is allowed—but it is almost always the worst possible choice. It should be reserve for dire circumstances. Why? Because the tax hit is significant. You will need to pay ordinary tax rates on the entire sum that year. And, if you are under 59.5 years of age, you will also be on the hook for the 10% penalty. Decisions, Decisions There is no universal strategy for 401(k) funds that applies to every retiree. The best strategy depends on individual factors such as your cash flow needs, tax circumstances and goals for retirement living. Our Wealth Management Team can help you choose the best option for your situation.