Employees leaving the workplace to retire have several critical choices to make regarding their 401(k) account. Depending on age, lifestyle and budget needs monies in 401(k) accounts can be rolled over to an IRA, kept in the employers 401(k) or withdrawn. While there are many similarities between IRA money and 401(k) money, the differences could mean an earlier retirement if the employee plans ahead.
Money in a 401(k) should be left untouched to continue to grow until the retiree is old enough to make withdrawals without triggering the 10% tax penalty after age 55.
Unlike IRA money, which triggers a 10% tax penalty if withdrawn before age 59 ½, retirees age 55 and older can withdraw 401(k) funds without penalty. Consider leaving funds in the 401(k) if they are needed sooner than later.
Workers who wish to retire early will find leaving money in a 401(k) to their advantage by making penalty-free withdrawals. Later retirees should consider and IRA rollover to give broader investment choices and continued tax-deferral.
Money transferred from a 401(k) to an IRA can be accessed prior to age 59 ½ by using the IRS 72t amortization formula. Consult a CPA before considering doing this to avoid potential penalties.
401(k) plans properly managed at and after retirement can give retirees more income and enhanced lifestyle.