401k after retirement

[RxGrad98]

Hi everyone. I apologize if this question has been answered elsewhere and I missed it. I understand that the majority of 401ks reinvest the dividends earned automatically. However, what happens after retirement and you are no longer contributing to the 401k? Are you able to take payment of dividends or are they still automatically reinvested? I'm starting to get a little more hands on in planning for retirement in hopes that I can retire as early as possible. My main thought so far is to leave my money in my 401k instead of rolling it over into another account, but whether or not dividends are paid out instead of reinvesting will greatly affect that decision. Thanks in advance for any insight.

 

[RxMan]

I think it depends. First, if your asking whether or not the dividends have to be reinvested would be a decision you can change at any time. There could be a cash equivalent money market fund within the 401k plan that you could roll your dividends into rather than automatically reinvesting them. It might be advantageous for someone who is retired to build up cash reserves in this manner.

If your question is should you keep your money in your 401k verses rolling into an IRA depends on the quality of your 401k investment options. If you have a good plan then it might be in your best interest to leave the money alone. If you can get better investment options with lower fees elsewhere rolling the money over makes more sense.

If your question is whether or not to take the dividends as a distribution from your 401k plan probably depends on factors like your age at retirement and your potential other sources of money. If you are under 59.5 (or in some cases 55) taking anything out of your 401k will incur penalties in addition to the taxes due. If you are at least 59.5 you could take those dividends as a distribution if you wanted. If you get to 72 years old or 70.5 years old if you turn that age prior to 2020 then you will incur the required minimum distributions for your 401k account which could include any dividends you might receive within the 401k plan’s investments.

 

[RunningBum]

Usually you have your choice of whether you reinvest dividends or take it as cash, within the 401K. 401K plans can have different rules though, so you'd have to ask your 401K administrator what the answer is for your plan.

In any case, you should be able to do manually whatever you want to do. If you want them to continue to be reinvested but have to take it as cash, just use the cash to purchase the fund you want. If you don't want them reinvested but they are, just sell the appropriate amount.

Many of us found that we could get lower fees in an IRA at Vanguard, Fidelity or Charles Schwab so we rolled it over, but some 401Ks have better or lower cost options not available to the general public.

 

[pb4uski]

I think most people keep reinvesting dividends so they can control the amounts that are distributed to them... it makes it easier for tax planning.

You wouldn't want to have your taxes hijacked by a last minute dividend distribution if you were taking dividends in cash.

There is no downside to reinvesting and withdrawing later... or even having dividends go to your settlement fund and withdrawing or reinvesting later.... but at least you have control.

 

[tmm99]

My 401K doesn't give me an option to not reinvest my dividends. There is no cash option. I can also only specify the amount of distribution by the $ amount, and my 401K sells stocks equally from all my funds. You should talk to your 401K admin and find out how yours is set up

 

[Out-to-Lunch]

This was alluded to by several others, but let me mention something plainly. Within the 401(k), you can move money around between different investment options at will*, with no tax consequences. So even if dividends were reinvested, you can siphon off as much as you want from each fund/investment at any time, and put it into another investment within the 401(k). You can take distributions out of the 401(k) as you please (once you are eligible for penalty-free distributions).

It is difficult for me to understand why "whether or not dividends are paid out instead of reinvesting will greatly affect" your decision to roll over from your 401(k) or not.


*Your 401k may have restrictions to prevent, for example, frequent trading, but that is not what you are asking about.

 

[OldShooter]

@RxGrad98, I think you are missing something important: After retirement there is rarely a need to keep your money in an ex-employer's 401K. I think almost all of us have moved our money to rollover IRAs at places like Schwab, Fido, and Vanguard.

About the only reason to keep $$ in an old 401K is if there are funds there that are very desirable to you. Stable Value funds, for example, or the zero cost funds that IIRC are available in some government retirement savings plans. A strong reason to ditch a 401k completely is if you are being charged some kind of annual maintenance fee on top of the fees built into the mutual funds.

Once your money is in an IRA, your question is moot. You can do whatever you want. Options abound.

 

[tmm99]

I didn't move my money out of my last employer's 401K to IRA because of the Age 55 rule, as I separated from my employment at Age 55 and I wanted to take distributions from it. Although I can now get distribution from my IRA without penalty, I still have money in my 401K as I like their funds and rebalancing is much easier.

Anyway, when I FIRED, I made it no DRIP for after tax accounts so I could spend the money for paying taxes, etc, but I did nothing for tax-deferred accounts.

 

[Big_Hitter]

I'm pretty sure if you are invested in mutual funds within a 401k, interest, dividends and cap gains are reinvested automatically. Mine are.

and I'm also considered "retired" or "terminated vested" not that it matters

 

[pb4uski]

.... About the only reason to keep $$ in an old 401K is if there are funds there that are very desirable to you. Stable Value funds, for example, or the zero cost funds that IIRC are available in some government retirement savings plans. A strong reason to ditch a 401k completely is if you are being charged some kind of annual maintenance fee on top of the fees built into the mutual funds.

Once your money is in an IRA, your question is moot. You can do whatever you want. Options abound.

Agree, but also in some cases if the retiree is less than 59 1/2 but worked until 55 they can withdraw from the 401k penalty-free and they can't do that if they transferred the 401k to an IRA.

 

[jollystomper]

I have kept my employer 401K. 70% of it is in a Stable Value fund that still has very good current and historic returns. I have no intention of moving it. My Megacorp charges extremely low fees, and as been noted as among the best in this area. As of now I have no compelling reason to move it.

 

[Dtail]

I have kept my employer 401K. 70% of it is in a Stable Value fund that still has very good current and historic returns. I have no intention of moving it. My Megacorp charges extremely low fees, and as been noted as among the best in this area. As of now I have no compelling reason to move it.

I/We still have 25% of investment funds in my 401k due to the Stable Value choice.
Too bad, I didn't realize just how good a fund this is, as would have moved some other monies in there while still working.

 

[armor99]

Agree, but also in some cases if the retiree is less than 59 1/2 but worked until 55 they can withdraw from the 401k penalty-free and they can't do that if they transferred the 401k to an IRA.

This is actually significant if you are planning to retire at 55. It would be horrible to move your money, and then have to pay penalties to get to it. Whereas had it stayed in the 401k no penalties at all...

 

[jazz4cash]

I had two 401k plans that were managed by Fidelity. I had planned to keep them forever due to access to stable value funds. Dividends were reinvested for all fund choices automatically before and after retirement. There was no option to do anything else. What did change after retirement is that one of the plans imposed some fees that were apparently absorbed by the employer when I was active. It was around $50/yr plus $25 when I took a distribution but I don't think they charged for systematic distributions. I rolled that 401k into an IRA. You really should check with the admin to see what options you have and what changes to expect when you are no longer active.

 

[Winemaker]

I have kept my 7 figure 401k, and take yearly distributions from it. I also have 3 rental properties, and although I have umbrella insurance, my attorney has advised me to keep my 401k assets in the 401k, to provide some legal protection from lawsuits. IRAs, are not protected as much, as he advised us.

 

[Big_Hitter]

This is actually significant if you are planning to retire at 55. It would be horrible to move your money, and then have to pay penalties to get to it. Whereas had it stayed in the 401k no penalties at all...

Agreed

 

[Born2Fish]

I have kept my 7 figure 401k, and take yearly distributions from it. I also have 3 rental properties, and although I have umbrella insurance, my attorney has advised me to keep my 401k assets in the 401k, to provide some legal protection from lawsuits. IRAs, are not protected as much, as he advised us.

That's my sole reason for staying in my old employer 401k.

 

[jazz4cash]

The state I live in has a pension exclusion that applies to distributions from workplace savings accounts like 401k but not IRAs.

 

[USGrant1962]

There are a lot of reasons to keep your 401(k), as there are reasons to roll over. Reasons to keep include:

• Rule of 55
• Better funds, especially Stable Value
• Cheaper funds. In my 401(k), S&P500 index is cheaper than Vanguard at 0.03% vs 0.04%, and some of the active funds are 0.10% cheaper than Vanguard equivalents.
• Financial institution diversification. If Vanguard's servers go down or my account gets locked I can still get to my 401(k) as an alternative.
• Better legal protections (in some states)
• Better state tax treatment (in some states)
• Loans from the 401(k), maybe. I think in my plan you must still be employed but, in any case, you cannot borrow from an IRA.

 

[jazz4cash]

^^This is a really good list. I found out after I retired that not only did I not have to immediately repay a 401k “loan”, I could also initiate a new loan. That could be handy to finance a major purchase or manage taxable income for ACA, IRMAA, etc. YMMV

 

[BigMoneyJim]

However, what happens after retirement and you are no longer contributing to the 401k? Are you able to take payment of dividends or are they still automatically reinvested?

I think the answer to the question you're asking is that the only thing that will change in your 401(k) after leaving or retiring is that you can't add any more money to it.

Most 401(k)s have open-ended fund as investment vehicle options, and I don't think I've ever heard of a dividend-minded person use open-ended funds for living off dividends, if that's what you're angling for. Open-ended mutual funds distribute aggregate dividends and capital gains quarterly (? I think...or maybe it's yearly.) In most cases it's nothing like holding dividend-paying stocks outside of retirement accounts.

And since it's a tax-deferred account, whenever you withdraw, no matter if it's "from dividends" or just redeeming shares, you're paying income tax on the withdrawn amount.

As seen above, there are plenty of details to consider when deciding whether to stick in a 401(k) or roll over to an IRA, but the question you're posing doesn't really seem to me to be an impactful factor.

Unless you're hoping they remain reinvesting, and they would.


That said, I'm not sure how things are these days, but 20-25 years ago the custodians seemed to be pushing the buy-an-annuity-with-all-of-your-401k-at-retirement plan, and if you didn't do your own research you might not understand you have many other options. I figured out the options 20 years ago and haven't really paid attention to financial marketing since then. And you seem to be ahead of the game yourself.

 

[Out-to-Lunch]

Typical. The OP joined a week ago, posted one question, and has not visited the forum since that day.

Meanwhile, 20 people have striven to provide incisive answers to guide his/her thinking.

Sigh.

 

[pb4uski]

I had two 401k plans that were managed by Fidelity. I had planned to keep them forever due to access to stable value funds. Dividends were reinvested for all fund choices automatically before and after retirement. There was no option to do anything else. What did change after retirement is that one of the plans imposed some fees that were apparently absorbed by the employer when I was active. It was around $50/yr plus $25 when I took a distribution but I don't think they charged for systematic distributions. I rolled that 401k into an IRA. You really should check with the admin to see what options you have and what changes to expect when you are no longer active.

I would gleefully pay $50/yr and $25/distribution to have access to a good stable value fund.

 

[Big_Hitter]

I would gleefully pay $50/yr and $25/distribution to have access to a good stable value fund.

the fees on ours are quite high - like 20 bips but it still pays about 2% net - I recently rebalanced and put 40% of my K money in it

 

[pb4uski]

Yup, 2% with no interest rate risk and negligible credit risk isn't too bad.