Retiring ? You have 401(k) options
Q
I am on the verge of retiring from my full-time job. I have a 401(k) with the company and was wondering what I should do with the account when I retire? I don’t want to “cash” out because of the high tax I may end up paying. Can this 401(k) be rolled over to some type of retirement account?
Gene Sing, Cary, N.C.
A You’ve got a couple choices that are more tax-friendly than taking the money.
One option: You can roll the entire 401(k) into an IRA, says Betty Meredith, the director of education and research for the International Foundation for Retirement Education in Ann Arbor, Mich.
If you go this route, make sure the money goes directly from the 401(k) plan to wherever you set up the IRA. This is called a trustee-to-trustee transfer. “It’s best to not take possession of the funds,” says Meredith.
The second and perhaps better option is to leave your 401(k) with your former employer. “A lot of people think they have to move the funds from the employer plan because they no longer work there,” Meredith says. “Many employer plans now allow retired employees to keep the funds with the employer, as more money in the plan helps keep overall costs down.”
There are benefits to keeping the funds with your employer. One, your former employer has a fiduciary responsibility to do due diligence and monitor the funds in the 401(k) plan, so you don’t have to. Two, employer-sponsored plans typically have institutional pricing/lower overall fees. And three, in general, you have better protection from creditors with a 401(k) than an IRA.
So, unless you’re unhappy with the funds offered in your 401(k) plan, Meredith recommends leaving your 401(k) with your former employer until you get your “retirement” legs. “You’re actually being prudent by not forcing a de- cision if you have the option to leave the funds with the employer,” says Meredith.
The next order of business: It’s time to take a more active stance with your investments. That means getting a handle on your sources of income and expenses in retirement. Do you need the money in your 401(k) plan for living expenses now? Do you need to claim Social Security now or can you wait to claim till, say, age 70? Can you work part time to cover any gaps between retirement income and expenses?
In time, and certainly before you start making any irreversible decisions, talk to a qualified, trustworthy adviser who specializes in retirement-income planning and who will act in your best interest.
In the meantime, Meredith offers this advice: “Don’t stress about it. Take some time to enjoy being retired and make these decisions later if it’s not clear to you what to do. No need to let the retirement date ‘tail’ wag the dog unless the employer plan is forcing a decision.”
Q
I turned 62 recently and applied for Social Security a couple of months prior. When can I expect my first payment?
Cheryl Mossing, Maricopa, Ariz.
A
You must be age 62 for an entire month. That’s because Social Security benefits are paid the month after they’re due.
You should receive your first payment on the third Wednesday of the month after your birthday.
There’s info about Social Security benefits being paid a month after they’re due at www.socialsecurity.gov/planners/retire/applying1.html.
Read also the Schedule of Social Security Benefit Payments 2015 at socialsecurity. gov/pubs/EN-05-10031-2015.pdf.
Q
I took Social Security early, at age 62, but I have continued working part time. I will be 70 in June. Will I get a raise according to how much I have earned in the last eight years?
Elsie Blankenship, Kingston, Ill.
A
The answer, for better or worse, is maybe. Your benefit is calculated based on the highest 35 years of earnings indexed for inflation, says Mark Lumia, the founder and CEO of True Wealth Group in Lady Lake, Fla.,
and the author of Thinking Outside the Money Box: The Best Concepts For A Worry-Free Retirement Are Off The Beaten Path.
So, if any of the eight years that you worked part time are higher than any of the other 35 years indexed for inflation, any of the years that are higher will replace the lowest years, Lumia says.
The good news is that you don’t have to worry about crunching the numbers. That’s because the Social Security Administration (SSA) reviews each year the records for all working Social Security recipients to see if additional earnings may increase their monthly benefit amounts. And, if an increase is due, the SSA figures a new benefit amount and pays the increase retroactive to January following the year of earnings.
If you want to get a sense of whether you might get a raise, create a “my Social Security” account at www.ssa.gov/myaccount/. There you can track your earnings and verify them each year; get an estimate of your future benefits if you are still working; get a letter with proof of your benefits if you currently receive them; and manage your benefits.