Keeping your 401(k) after retirement could be smart: survey

New retirees face many important decisions that can help or hinder their financial security: Should they downsize? When is the best time to apply for Social Security? And where should they keep their retirement savings now that they’re finally ready to use them?

Determining where to keep retirement savings is one of the most important choices retirees make when they leave the workforce. Those who participate in an employer-sponsored plan such as a 401(k) can generally keep their savings in that plan, roll it into an individual retirement account (IRA), or cash out the entire sum (and pay taxes on it ).

A September study by economists Olivia S. Mitchell, Catherine Reilly and John Turner found that while IRAs may offer some benefits, most retirees would be better off keeping their savings in employer-sponsored accounts. According to researchers, this is especially true for retirees with limited assets and lower levels of financial literacy.

Changes to the law, they say, could provide even more incentives for retirees to stay on employer plans in coming years.

401(k) versus rollover IRA

Nowadays, most retirees’ nest eggs are amassed through employer-sponsored defined-contribution plans like 401(k)s—about 67 percent of American workers have access to them, according to the Bureau of Labor Statistics of the United States.

But once you retire, figuring out where to house your savings becomes a critical — and often complicated — financial decision, according to Mitchell, a professor at the University of Pennsylvania’s Wharton School. Retirees must not only evaluate the tax implications of their options, but also determine which path will produce the best returns with the least risk.

This is particularly important because retirees need to ensure that these assets last into retirement – ​​a growing challenge in a context of rising costs of living and expanding life expectancy.

Many people choose to roll over their 401(k) funds into an IRA, which is a different type of tax-advantaged retirement account, when they retire.

In addition to tax advantages, IRAs tend to offer more customized advice, investment choices, and distribution options than workplace plans. As a result, IRA account holders typically enjoy greater control over their investments and greater withdrawal flexibility. This route is relatively popular: A 2021 study by Pew Charitable Trusts found that about 46% of recent retirees rolled over their savings to IRAs.

Why keep savings in an employer pension plan

But there are some important benefits to staying in a workplace plan, namely that employers continue to assume fiduciary responsibility for such funds even when workers retire, Mitchell says. This provides a level of investor protection because the trustee is required by law to act in the best interests of the participants when choosing and managing investments.

Savings in a defined contribution plan are protected from creditors even if a person files bankruptcy, unlike an IRA, Mitchell says.

Both IRAs and employer-sponsored retirement plans have advisory, investment management and administrative fees, but with plans from large companies, these costs are generally lower than a typical IRA. Employers are often able to negotiate better rates and customized investment products for older participants because they have institutional leverage, Mitchell adds. (In particular, they can provide options to purchase annuities with 401(k) savings, giving retirees the opportunity to turn their assets into a guaranteed lifetime income stream and protection from outliving their savings.)

Staying in a well-managed business plan can be especially beneficial for retirees with less savings and less financial experience – that’s most older Americans, according to research – because they don’t have to choose or manage their own investments.

Early retirement is another factor to consider when planning where to keep your assets in retirement. With both IRAs and defined contribution plans, you must be at least age 59½ to begin making penalty-free withdrawals. But thanks to an IRS rule, if a worker is at least 55 years old and quits or loses their job for any reason, they can start making withdrawals from their 401(k) or 403(b). without paying the 10% penalty.

However, there are times when it makes sense to put your savings into an IRA. Smaller employer plans tend to carry higher fees, so in this case an IRA is more convenient for retirees. Mitchell says IRAs can also be more beneficial if a retiree wants to consolidate a few different plans from different employers.

And for those who want to purchase an annuity and don’t have the option to do so under their employer plan, an IRA usually makes it easy to convert savings into a lifetime income stream.

Changes to Workplace Retirement Plans Under the SECURE Laws

While most employer plans do not currently offer lifetime annuities, Mitchell says new provisions in the legislative packages known as SECURE 1.0 and 2.0 have incentivized employers to provide lifetime benefit payments. The broad set of pension plan provisions are intended to help Americans increase their retirement savings in a landscape where most workers no longer have defined benefit or pension options.

“A number of legislative steps have been taken in the United States in recent years to encourage ‘pension rollback’ into defined contribution plans,” he says.

The SECURE 1.0 Act of 2019 allowed employers to add annuity options to their plans. With 2022’s SECURE 2.0, plan participants can now purchase deferred annuities, which will ultimately provide the owner with a regular payment at a set future date, up to $200,000 using assets in their account, according to Mitchell.

This allows workers to defer a larger share of their retirement income from taxes, he adds. These regulations, in addition to a number of existing benefits, have overall made it more attractive for retirees to keep their savings in employer plans.

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