Cents and Sensibility
Cents and Sensibility
Does a 401(k) annuity payout
make sense for you?If you have a 401(k) plan where you work, you'll have an important decision to make upon your retirement. Specifically, how should you take your 401(k) money? Let's consider the distribution options available to you.
>> You can take the money as a lump sum. If you need a large sum of money immediately upon retirement, taking a lump sum may be right for you. However, your plan will immediately withhold 20 percent for taxes, and you may have to pay more later.
>> You can leave the money in your plan -- Not all 401(k) plans offer this option. But if it's available, it may be a good choice for you if you like the investment options in your 401(k) and if the plan allows you to withdraw funds as often as you need after you retire. You will have to start making withdrawals by age 70 1/2.
>> You can move your money into an IRA. If you move your 401(k) into a "rollover IRA," your money will continue to grow on a tax-deferred basis, and you'll avoid the 20 percent federal withholding. You can withdraw money as you need it, subject to IRA minimum distribution rules, and you'll pay income tax only on the amount you withdraw. (Withdrawals before age 59 1/2 may be subject to a 10 percent early withdrawal penalty.) Plus, you can fund your IRA with virtually any type of investment -- stocks, bonds, government securities, etc.
>> Your final distribution option is to convert your 401(k) into a lifetime annuity, purchased from a private insurance company. Not all plans offer this choice, but if they do, it is an option worth considering for one reason alone: it offers you an income stream you can't outlive. Every month, for the rest of your life, you'll receive a check for the same amount of money -- even if the cumulative payments exceed the amount you paid into your 401(k).
Furthermore, you can extend your annuity over the course of two lifetimes. Thus, when you die, your spouse will start receiving the monthly payments. As is the case with IRA withdrawals, your annuity payments are subject to ordinary income tax. However, you'll need to take into account two possible drawbacks: First, your payments will not be indexed for inflation, so, over time, you will lose purchasing power. And second, there's no death benefit to this annuity -- when you and your spouse pass on, the payments stop.
Ultimately, you'll have to look at your overall financial picture before you decide if taking your 401(k) distribution as an annuity is a good idea for you. If, after reviewing your situation, you identify a need for a regular source of income, the annuity may be a possibility. But if you know that you'll have enough money coming in from a variety of sources, and you want to maximize the assets you leave to your beneficiaries, you might want to consider other distribution options.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com