Congratulations! After a lifetime of hard work, it’s time to kick back, relax and relax some more. But first, create a game plan for your retirement investments. How you use them will make all the difference in your retirement years – whether they’re a time of stress and anxiety, or the happy and relaxing years you’ve been dreaming about.
If you’re like most of us, you probably have a retirement plan through your employer. You’ve been putting all those untaxed dollars away for this day, and what’s more, you haven’t paid taxes on any investment earnings. If you’ve had it for a while, there might be a healthy lump sum waiting for you –thanks to those pretax contributions and tax-deferred growth. These same tax benefits are why you have to think carefully about what to do with your money. The IRS has allowed you to grow it a while. Now, they’re due their share.
Where’s your money stashed?
First, you’ll want to figure out where you have money – you’ve probably accumulated funds in a variety of investments, your employer’s plan among them. While you’re adding up your assets, take a look at your liabilities to make sure you can continue to meet your financial obligations after you retire. Then you can determine what to do with the money you’ve saved in your employer’s retirement plan. This is also an excellent time to review your life insurance policy and discuss it with your insurance agent or financial professional.
And now, back to the IRS
Your employer’s plan allowed you to contribute pretax dollars and allowed your money to grow tax- deferred. Even if you’re older than 59½ and not subject to early withdrawal penalties, when you start withdrawing the funds, those deferred taxes start becoming due. What this means is that if you withdraw the money as a lump sum – and say, put it in your savings account or in mutual funds – you’ll have to pay taxes on the entire amount. That amount could be substantial enough to bump you into a much higher tax bracket than when you received a regular paycheck!
Thankfully, you have several other options to make your retirement savings fit your immediate and long-term goals including:
Stay or roll over?
When it's time to retire, you have several options available when it comes to deciding what to do with the money in your employer's plan. Presuming you are not starting a new job that may also offer a plan, you can either leave the money in your existing plan, cash out, or roll your money to an IRA (if you are starting a new job, you can opt to roll it to that employer's plan). You should carefully consider any differences in costs or features between your existing plan and another plan/IRA.
Set up a systematic withdrawal
Your employer’s plan or an IRA should allow you to take a series of periodic withdrawals from your account balance. As you take each withdrawal, you’ll surrender a portion of the shares in your investments. And of course, those deferred taxes will also be due. But the good news is you’ll only be taxed on the amount that you withdraw.
Guarantee your income
Your plan might allow you to use all or part of your investment to purchase a fixed annuity. Like a systematic withdrawal, a fixed annuity turns your assets into a series of payments. But with annuity payments you have choices; you can choose how long the payments will last, guarantee an interest rate for the length of the annuity, and select from income-for-life options – protecting you from the risk of outliving your money.
Mix it up
Of course, you don’t have to choose just one option. You may be able to get great results combining them. For example, you may be eligible to use part of your assets to guarantee an income stream with a fixed annuity, while you take systematic withdrawals from what you leave in the plan. Or you may choose to roll a percentage into an IRA to preserve for your heirs, and purchase a fixed annuity with the rest.
Talk to someone
As with most important financial decisions, it may be helpful to talk to a pro. One of our financial advisors will be happy to help you review and compare all your options and explain the tax consequences of each to find the solution that makes the best sense for you. Call us today.
Carefully consider the provisions of your current retirement plan and the new product for differences in cost, benefits, surrender charges or other important features before transferring assets. You should consult your own legal and tax advisors regarding your situation.
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. We recommend that you consult an independent legal or financial advisor for specific advice about your individual situation.
The tax information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
Securities and investment advisory services offered through Voya Financial Advisors, Inc. member SIPC.
Neither Voya nor its affiliated companies or representatives provide tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.