Financial Planners: Why You Should Stay in Your 401k in Retirement

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meshaphoto / Getty Images

Understanding how to balance and strategize the right types of retirement accounts to give you the best tax benefits and income in retirement can be challenging.

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Many financial advisors suggest that retirees consider a 401(k) to Roth IRA conversion during retirement to lower taxes, but there are several 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 a 401(k) in retirement is bankruptcy and creditor protection, according to Jake Skelhorn, CFP with Spark Wealth Advisors, LLC.

IRA protection varies by state, but may be more susceptible to lawsuits than 401(k) plans which are fully protected under ERISA (Employee Retirement Income Security Act). If you’re a retired business owner or could be a 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 who retire before age 59.5, the rule of 55 says you can start withdrawing from a 401(k) plan without penalty if you leave that employer during the year you turn 55 or later, Skelhorn said. If you roll over your 401(k) to an IRA, you have to wait until 59.5 to avoid a penalty, with some exceptions.

Outstanding loans

If you have any outstanding 401(k) loans after you retire, you’ll likely need to pay them off before rolling over to an IRA or Roth IRA if you want to avoid credit default and become taxable, Skelhorn said.

Depending on your plan’s rules, you can pay in full or continue the payment schedule by using a bank account or sending checks to the plan administrator, he said.

If your 401(k) offers annuities

Some 401(k) plans offer post-retirement annuity options, where you can use your balance to buy an income stream for the rest of your life, or the life expectancy of you and a spouse, Skelhorn explained.

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If the monthly payment from this option is more than enough to meet your retirement needs, switching to an IRA may not be necessary. However, this option should not be taken lightly, as once this decision is made, it is generally irreversible without significant delivery fees.

Lower fees

Another reason some people choose to leave their 401(k) alone and not roll into an IRA after official retirement is because of the account’s low fees, according to John Jones, certified financial consultant, IRS Enrolled Agent and investment advisor at Heritage Financial. .

However, it is important to educate ourselves that fees are only a problem in the absence of value, and one must ask what real value or support does a 401(k) provider have? Jones said.

If you have multiple 401(k)s

Another reason someone might prefer to stay in a 401(k) from a previous employer is the borrowing provisions the 401(k) can provide that aren’t typically available with an IRA.

Additionally, for those who change employers frequently, if there are various 401(k) plans left over from previous employers, it’s very easy for the account to lack the proper oversight needed for a successful retirement, Jones said. .

Additional Benefits

For some retirees, maintaining a 401(k) offers benefits such as access to institutional investment options with lower fees, creditor protection, and the ability to delay required minimum distributions (RMDs) if you’re still working at age 72. , according to Michael Hills. a Certified Fund Specialist (CFS) with Apex Wealth.

Maintaining 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 for liability management tax, Hills said.

Ultimately, the appropriateness 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 about 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.com: Financial Planners: Why You Should Stay in Your 401k in Retirement

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