Unconventional Distribution Options For 401k Retirement Funds?

Answer 1

The funds that are held in a 401k retirement plan become available for withdraw once the age of the account holder is greater than the federal retirement age. This distribution of money from the account becomes mandatory as a person grows even older. There are some options that can be used in order to change the way that money is distributed or to delay the mandatory minimum distribution so that funds in the account can continue to compound due to investments.

One option that 401k account holders have after reaching the federal retirement age is to withdraw money in a single lump sum. This type of distribution comes with a 20 percent penalty. The money that is lost to the penalty can be regained, however, at the end of the year. The 20 percent that is removed from the account can reduce the amount of money that is owed in taxes at the end of the year or can increase the amount of a tax return. There are some mitigating factors that can prevent this from occurring. A lump sum distribution can provide a retiree with access to nearly all of the money in a 401k in just under a year.

Individuals who meet certain income requirements might be able to take the funds in a 401k and rollover the amount into a Roth IRA. Roth IRA accounts have different minimum distribution guidelines. This can allow the account to increase in value for a longer period of time regardless of the age or employment status of the account owner. A Roth IRA also has a few more favorable tax benefits than a 401k when it comes to withdrawing money after retirement.

There are some instances where a 401k account is earning significant amounts money each period. Accepting the mandatory minimum distribution could decrease the value of the investments in the account. One option that can be used when an account is doing very well is to deny the required distribution each year. This action will cost the account holder half of what the distribution would have been. The benefit, however, is that a high earning account might be able to quickly recoup this loss with the funds remaining in the 401k.