Got a 401k? A Guide for New Retirees

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Upon retiring, you suddenly have access to a chunk of money that’s been accumulating in your 401(k). It’s easy to make a move that incurs unfamiliar tax consequences or otherwise jeopardizes your hard-earned savings.

Based on interviews with financial planners, as well as experts at the Center for Retirement Research, which funds this blog, Squared Away assembled the following check list for imminent and new retirees:

  • At least one year before retiring, collect information from:
    • Social Security – how does your monthly check vary, depending on the filing age you select, and how can you and your spouse determine the best strategy for getting the benefits you’ll need?
    • Your employer – is an annuity an option in your 401(k) plan, or how much can you expect to receive per month from a defined benefit pension?
    • A fee-only planner or other financial resources – what are your priorities and options; how much retirement income do you need; do your Social Security, 401(k) savings, and employer pensions generate enough income, and with how much risk; should you delay Social Security to increase your total monthly income; and should you purchase an annuity to cover your fixed expenses?
      “Make sure before you stop working that you’re financially prepared to do so,” said John Spoto, owner of Sentry Financial Planning in Andover, Mass., near Boston.
  • It’s an especially bad idea for a retiree to withdraw any 401(k) savings before turning 59½, because the IRS will slap on a tax penalty equal to 10 percent of the amount withdrawn. Retirees also pay income taxes on that withdrawal.
  • For someone over 59½, withdrawing the entire 401(k) amount at once is not advisable – your age exempts you from the 10 percent penalty but there are other considerations.
  • “This is the lump sum that needs to last for your entire life,” said Robert Kreitler, a New Haven, Conn., financial planner. “You don‘t want to take your money and spend it on upgrading your kitchen.”

  • There are two excellent reasons for maintaining your 401(k) with your employer, if you’re allowed to.  First, employers have a legal responsibility to offer investments suited to retirement accounts.  Second, their investment options may have lower fees.  But some employers charge retirees to continue administering their 401(k)s.  If that’s true for you, weigh this cost in your decision.
  • If you decide to transfer your 401(k) savings to a personal IRA, ask your new IRA institution to handle the rollover for you.  This direct transfer will keep the tax shelter intact and eliminate the 20 percent tax withholding dictated by the IRS – if not, you’ll have to wait until tax time to get the withholding back.
  • IRAs should, like 401(k) investments, be broadly diversified.  Retirement is not a time to become a stock picker.  Mutual fund companies also often provide investment guidance to new IRA clients – personal advice might even be free.
  • Low investment fees can mean the difference between good and poor returns to your retirement savings.  If you can find an IRA with lower investment fees than your employer’s 401(k), that is a reason to transfer out of the 401(k).  Look for index funds that track the markets, such as the Standard & Poor’s 500 stock index or a bond index; index funds usually have lower fees than mutual funds that use managers to actively invest their assets.
  • Make sure your IRA is covered by the federal Securities Investor Protection Corporation (SIPC) or other protections, which insure your securities are safe should your financial firm fail.
  • When the paychecks stop coming in, you give up much of your financial flexibility. These are critical decisions, so you need to research and understand the consequences before you act.
Dennis Ackley

Three more considerations about 401(k)s and rollovers to IRAs.

This matters if you’re age 55…and not yet 59½:

Content from IRS “Topic 558 – Additional Tax on Early Distributions from Retirement Plans, Other Than IRAs” says:
“The following additional exceptions [to the tax penalty] apply only to distributions from a qualified retirement plan [401(k)] other than an IRA…Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55.…” The details are in §72(t)(2)(A)(v) of the Code.

This matters if you have employer’s stock in your 401(k):
The net unrealized appreciation tax opportunity allowing capital gains rates on the stock can be missed by rolling 401(k) accounts to IRAs.

And in a few cases:
There are some state laws that create differences between 401(k)s and IRAs when it comes to lawsuits and other legal actions.

Details about these and other considerations should be discussed with a tax expert.

Ted Leber

GR8 Blog item Kim.
As always fees will matter and having a number of low cost index funds will help.
Keep it going.

Joel L. Frank

Let’s say it like it is!

If all employer sponsored Defined Contribution plans followed the model practiced by the federal government via its Thrift Savings Plan we all would have tens of thousands of dollars more during our old age.

The Fiduciary Standard must be practice by employers that offer DC plans. This means that commissioned based “actively managed” funds are not to be on the plan’s investment menu. See: Deferred Compensation Plan of the City of New York; Deferred Compensation Plan of the State of New York; Deferred Compensation Plan of Connecticut.

See: New Jersey State Employees Deferred Compensation Plan as an example of a plan that ignores the Fiduciary Standard.


As a younger married couple (24 and 25), my wife and I are facing many of the decisions that you categorize as ’30s’ in our ’20s.’ It is difficult, but worth it. We are able to utilize our 20s in such a way that will hopefully set us up for success earlier since we recognize that we are facing ‘the big and important’ decisions now, and as a team!


Nice to see someone talk about the 72t IRS clause for acquiring your 401k funds prior to 59 1/2 without penalty by following the IRS guidelines for age-based fixed withdrawals at 55 until reaching 59 1/2.

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