Ask an Advisor: What Steps Should I Take With My Retirement Account After Retiring?
When entering retirement, would it be best to transfer your pension fund and 401(k) from your employer account to your own personal individual retirement account (IRA), keeping them under one roof?
-Randy
There are a couple of things to be aware of as you consider whether to move your retirement accounts after you retire. I like to start by first considering how different decisions affect your plan. Then, I factor in convenience.
In your case, I’d separate the components into separate decisions for your pension and 401(k). (For more information on how to handle your savings in retirement, consider working with a financial advisor.)
Transferring Your Pension
When you retire with a pension, you’ll typically have a choice between taking a lump sum or choosing one of a few monthly payment options.
Rather than framing your pension decision in terms of whether you want to transfer it, give proper consideration to which payout form makes the most sense for you in light of your other income sources and overall plan. Be deliberate about your choice and don’t rely on rules of thumb or gut feeling.
Let’s assume you decide to take the lump sum option. In that case, the natural place for it to go is an IRA. You could also take a lump sum in cash. But it will immediately be taxable, which is rarely the best route.
Transferring it into an IRA lets you continue to benefit from tax-deferred growth and proactively manage your taxes. (For more information on how to handle your savings in retirement, consider working with a financial advisor.)
Transferring Your 401(k)
Employers incur costs for maintaining a 401(k) plan, and those may be passed on to you. If your plan does, transferring your account to an IRA can also help you avoid those fees and reduce your total expenses.
Your plan may charge you directly, or the fund options may include those fees through higher expense ratios. It’s also possible that your plan administrator covers those fees for participants. You’ll need to check your plan documents to see. Make sure you compare them to the fees you’d pay in your IRA. Remember: You can shop around.
Rolling a 401(k) into an IRA may give you more flexibility and investment options. This depends on where you decide to open your IRA. Of course, you are free to choose. Again, be deliberate with your decision and choose a brokerage firm that offers the features and services you want.
A particularly powerful planning factor to consider is your age and whether or not your plan allows for penalty-free withdrawals at 55. This “rule of 55” is a major benefit if you retire before you turn 59 1/2. It allows you to take distributions from your plan without incurring the typical 10% early withdrawal penalty. Of course, if you are already over 59 1/2, or it isn’t written into your plan documents, it’s a moot point. (For more information on how to handle your savings in retirement, consider working with a financial advisor.)
Next Steps
If you decide to transfer your pension, 401(k), or any other accounts or retirement plans from former employers into an IRA, it’s often best to move them all into the same account. This simply makes things easier to track and manage.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor is he an employee of SmartAsset, and he has been compensated for this article.
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