What to do with your 401(k) when you retire?

James K. Ault • July 12, 2022

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Knowing that you can count on a set amount of income to arrive throughout your retirement is a key factor in how – and how well – you will live. In many cases, the largest amount of savings that a retiree has is the funds inside of an employer-sponsored retirement program like a 401(k) – which can be converted into an ongoing cash flow stream. With that in mind, it’s important to know what to do with your 401(k) when you retire.

How to Turn Your Employer-Sponsored Savings Into Lifetime Income in Retirement

While you may be able to count on income from Social Security when you retire, this source is estimated to only  replace  about 40% of pre-retirement earnings for an average wage earner. So, without an employer pension plan to rely on, where will the remainder of your future income come from?

One option is through an annuity – and that annuity may be funded using some or all of the funds that you have in your 401(k) or other similar retirement savings plan.

Many retirees will “roll” their 401(k) funds directly into an annuity, where they can then start receiving income right away (from an immediate annuity), or income that starts at a time in the future (via a deferred annuity).

If you opt to roll your retirement savings over to an annuity, there are two options that you may have. These include a direct rollover or an indirect rollover – and it is important to know the difference between the two, because the way you move forward could have tax-related consequences, as well as potential penalties.

Direct versus Indirect 401(k) Rollover to an Annuity

With a direct rollover, you move the money that you have in your retirement account directly into an annuity. In this case, you never actually take receipt of the funds. Nor does it require you to first “cash out” of the retirement account and then re-invest the money in an annuity. This, in turn, can help you to avoid tax implications and possible penalties.

On the other hand, with an indirect roll over, you move money from a qualified plan, such as a 401(k), to a bank. Then, the money is again moved, this time going from the bank into the annuity that you choose.

Note that if you have a personal IRA (Individual Retirement Account), these funds may also be rolled over into an annuity and in turn, be converted into a stream of income for you when you retire.

Having funds in an annuity can allow you to choose an income stream for a pre-selected period of time, such as 10 or 20 years. Or, you could instead choose to obtain lifetime income from the annuity that will continue to flow in on a regular basis for the remainder of your life, no matter how long that may be!

Are You Ready to Discover the Retirement Income Options that Can Make Your Financial Future Secure?

Rolling over money from a 401(k) plan can have a lot of “moving parts” involved. So, in order to ensure that the process moves along smoothly, it is recommended that you first discuss your options with an annuity specialist. A professional who focuses on annuities can also help you with determining which annuity (if any) is right for you, based on your objectives, risk tolerance, and retirement time frame.

At Sooner Retirement, our primary mission is to educate consumers on how annuities work, and why they may fit into an overall retirement portfolio. So, if you would like to set up a time to chat with an annuity specialist, please feel free to contact us by phone at  (918) 719-1848  or by email through our secure online form. We look forward to assisting you with setting up an income for life in retirement.

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