It’s important to know the rules, regulations governing 401(k)s and retirement accounts

Retiring marks an important point in your financial life, with long-term significance. Therefore, it is important to know the regulations and rules for 401(k)s and retirement funds that can be confusing.

It is crucial to contact a financial professional to help you understand your options as you make these important decisions before or immediately after you retire.

“The rules controlling what you can do with your 401(k) after you retire can be complicated. The IRS and your personal financial plan determine what you are and are not permitted to do with your investment. If you are unsure about the rules applying to your plan, contact your company’s plan administrator for details and talk to a financial advisor before making any final decisions,” said Linda Cong Donovan, a financial advisor at Morgan Stanley in Houston.

However, many companies let you keep your money in your 401(k) after you retire and leave the company.

Rules vary

“Although you can no longer contribute to your account, you can still manage your investments and make withdrawals. Specific rules vary by plan, so talk to your benefits department or call your 401(k) provider. They can answer questions about your withdrawal options and any fees associated with your plan and your investments,” said Gerry Weil, CFP, vice president and Houston branch manager at Charles Schwab.

You also can roll your account into an IRA and continue to defer taxes until you begin to withdraw money from the IRA.

“A third option is to take a lump-sum distribution, but remember that taxes will be due if you take the cash, and possible penalties, too,

depending on your age. Talk with an accountant to be sure you understand the tax implications of a lump-sum distribution,” Weil said.

RMD schedule

With a 401(k) you must begin taking required minimum distributions (RMDs) no later than April 1 of the year following the calendar year in which you turn age 70½.

“That same rule applies to traditional IRAs. It is important to get your RMDs right, since the IRS imposes severe tax penalties for insufficient or late RMDs.

“Determining your RMDs can be complicated, especially if you have several retirement accounts, so be sure to contact your financial advisor,” Weil said.

Note that if you wait until April 1 of the year after you turn age 70½ to take your first RMD, you will have to take two distributions in the same year: one for the year you turn age 70½ and one for the current year. This could have additional tax implications.

When you start drawing on your 401(k) depends on the age at which you retire and your personal financial plan.

Generally speaking, if you retire after age 59½, the IRS allows you to begin taking distributions from your 401(k) without a 10 percent early withdrawal penalty.

“There are exceptions that may apply in certain circumstances, such as disability or job loss, among others. Some people have other assets they chose to use before tapping into their 401(k),” Donovan said.

Options available

Each individual should take their own situation into account when planning for retirement. A meeting with a financial advisor can help you assess your needs and decide on the best option for you.

“Generally speaking, depending on the rules of your individual plan, you will have a few choices to consider. For example, if your 401(k) meets your needs, you can consider taking periodic disbursements directly from your 401(k).

Depending on your plan, you may be able to periodically adjust the amount you receive monthly or quarterly,” Donovan said.

Whether you are nearing retirement or are already retired, be sure your investments are aligned with your risk tolerance.

For retirees, this typically means having more of your money invested in bonds and less invested in stocks, but you’ll likely need both types of investments.

Your retirement money needs to last a long time, often 20 years or more, so a portfolio of both stocks for growth potential and bonds to help manage risk is important.

For information

Morgan Stanley is a global financial services firm providing investment banking, securities, wealth management and investment management services. For further information, visit one of its six Houston offices or www.morganstanley.com.

Charles Schwab is a full-service investment services firm offering access to a range of investing and personal finance services, products and guidance. For more information, visit a branch, phone 713-499-6638 or go to www.schwab.com.