It can be difficult to figure out how to balance and strategize how to choose the right types of retirement accounts to give you the best tax benefits and income in retirement.
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Many financial advisors suggest retirees consider a 401(k) to Roth IRA conversion in retirement to save taxes, but there are valid reasons to stay in a 401k, depending on your situation.
Financial planners explain eight reasons why you should keep your 401k in retirement:
Protection against creditors and bankruptcy
One of the best reasons to stay in a 401(k) in retirement is bankruptcy and creditor protection, according to Jake Skelhorn, CFP at Spark Wealth Advisors, LLC.
“IRA protection varies by state, but may be more vulnerable to lawsuits than 401(k) plans which are fully protected by ERISA (Employee Retirement Income Security Act). If you are a retired business owner or might be the target of lawsuits even after retirement, it may make sense to keep your money in the 401(k),” Skelhorn said.
Consider the Rule of 55
For those who retire before age 59.5, “the age 55 rule says you can begin withdrawing from a 401(k) plan without penalty if you leave that employer during the year.” year you turn 55 or older,” Skelhorn said. “If you roll over your 401(k) to an IRA, you must wait until 59.5 to avoid a penalty, with some exceptions.”
Current loans
If you have outstanding loans in your 401(k) after retirement, you will likely need to pay them off before switching to an IRA or Roth IRA, if you want to avoid the loan going into default and becoming taxable, Skelhorn said.
“Depending on your plan rules, you can pay it back 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, in which you can use your balance to purchase an income stream for the rest of your life, or for the life expectancy of both your spouse and your partner. spouse, Skelhorn explained.
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“If this option’s monthly payment is more than enough to meet your retirement needs, switching to an IRA may not be necessary. This option should not be taken lightly, however, because once this decision is made, it is generally irreversible without significant redemption fees.
Reduced fees
Another reason some people choose to leave their 401(k) alone and not “opt in” to an IRA after formal retirement is due to the account’s low fees, according to John Jones, a certified financial consultant, registered agent. IRS and investment advisor at Financière du Patrimoine.
“However, it is important to understand that fees are only an issue in the absence of value, and one must ask, what is the true value or support available to a 401(k) provider?” » said Jones.
If you have multiple 401(k)s
Another reason one may prefer to keep their 401(k) with a previous employer is the borrowing provisions that the 401(k) can provide that are generally not available with an IRA.
“Additionally, for those who change employers frequently, if there are various 401(k) plans remaining from previous employers, it is very easy for the account to lack the proper oversight necessary for a successful retirement,” Jones said.
Additional benefits
For some retirees, sticking with a 401(k) offers benefits such as access to institutional investment options with lower fees, protection from creditors, and the ability to delay required minimum distributions ( RMD) if they’re still working at age 72, according to Michael Hills, a Certified Fund Specialist (CFS) at Apex Wealth.
Preserving tax-deferred growth
Additionally, individuals in higher tax brackets or anticipating a lower tax rate in retirement may find that maintaining a traditional 401(k) preserves tax-deferred growth and provides more great flexibility in managing tax obligations, 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 Keep Your 401k in Retirement
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