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Why You Should Stay in Your 401k in Retirement
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Discover how to balance and strategize the right types of retirement Accounts to bring you the best tax benefits and income in retirement can be a challenge.
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Many financial advisors suggest that retirees consider a 401(k) to Roth IRA conversion in retirement to reduce taxes, but there are some valid reasons to stay in a 401k depending on your circumstances.
Financial Planners Explain Eight Reasons why you should stay in your 401k in retirement:
Creditor and bankruptcy protection
One of the best reasons to stay in your 401(k) in retirement is bankruptcy and creditor protection, according to Jake Skelhorn, CFP at Spark Wealth Advisors, LLC.
“IRA protection varies by state, but it may be more vulnerable to lawsuits than 401(k) plans, which are fully protected by ERISA (Employee Retirement Income Security Act). If you are a retired business owner or may be the target of lawsuits even after you retire, it may make sense to keep your money in your 401(k),” Skelhorn said.
Consider the rule of 55
For those retiring before age 59.5, “The rule of 55 says you can begin withdrawing from a 401(k) plan without penalty if you leave your employer during the year you turn age 55 or older,” said Skelhorn. “If you roll your 401(k) into an IRA, you must wait until 59.5 to avoid a penalty, with some exceptions.”
Outstanding loans
If you have any outstanding loans against your 401(k) after you retire, you’ll likely need to pay them off before rolling them over to an IRA or Roth IRA if you want to avoid the loan going into default and becoming taxable, Skelhorn said. .
“Depending on the rules of your plan, you can pay in full or continue the payment schedule through a bank account or by sending checks to the plan administrator,” he said.
If your 401(k) offers annuities
Some 401(k) plans offer annuity options after retirement, where you can use your balance to acquire an income stream for the rest of your life, or for your spouse’s life expectancy, Skelhorn explained.
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“If the monthly payment from this option is more than enough to meet your retirement needs, you may not need to roll over to an IRA. This option should not be taken lightly, once this decision is made it is generally irreversible without significant delivery fees.”
Lower fees
Another reason why some people choose to leave their 401(k) alone and not “roll over” to an IRA after official retirement is due to the account’s low fees, according to John Jones, a certified financial advisor, IRS Enrolled Agent. and investment consultant in Financial Assets.
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“However, it is important to know that fees are only an issue in the absence of value, and one must question what true value or support one has from a 401(k) provider?” Jones said.
If you have multiple 401(k)s
Another reason someone may prefer to stay with a previous employer’s 401(k) is the loan provisions that the 401(k) can provide that are generally not available with an IRA.
“Additionally, for those who change employers frequently, if there are multiple 401(k) plans remaining from previous employers, it is very easy for the account to not have the adequate oversight necessary for a successful retirement,” Jones said.
Additional benefits
For some retirees, joining a 401(k) offers benefits like access to lower-fee institutional investment options, creditor protection and the ability to delay required minimum distributions (RMDs) if you’re still working at age 72, according to with Michael Hills, a Certified Fund Specialist (CFS) with Apex Wealth.
Preserving Tax-Deferred Growth
Additionally, individuals in higher tax brackets or who anticipate a lower tax rate in retirement may find that maintaining a traditional 401(k) preserves tax-deferred growth and provides greater flexibility in managing tax obligations, he said. Hills.
“Ultimately, the suitability of a Roth IRA conversion versus maintaining a 401(k) depends on individual circumstances, including tax considerations, investment preferences, and long-term financial goals.”
Decisions regarding your retirement accounts should always be made with the help of a financial professional whenever possible. Otherwise, make sure you understand not only where your retirement income will come from, but also the tax consequences of the options you choose.
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This article originally appeared on GOBankingRates. with: Financial Planners: Why You Should Stay in Retirement