How to access your 401(k) after retirement

Whether you're approaching retirement or already settling into it, congratulations on reaching this exciting milestone. After years of planning and saving, it's time to think about how to turn those retirement assets into income. For retirement plans like 401(k)s, there are important factors to keep in mind, such as withdrawal rules, taxes, and how to manage retirement expenses. Let’s explore how to access your 401(k) and the different strategies that can help make the most of these savings in retirement.

When can I withdraw from my 401(k)?

Individuals can begin taking withdrawals from a 401(k) without penalty at age 59½. Withdrawals made before this age typically incur a 10% early withdrawal penalty, in addition to income taxes. At age 73, the IRS requires that Required Minimum Distributions (RMDs) be taken each year. RMDs are the minimum amounts that must be withdrawn from retirement accounts to avoid further tax penalties.

How does a 401(k) withdrawal affect tax returns?

Withdrawals from a traditional 401(k) are generally taxed as ordinary income in the year they are taken. For individuals who have reached age 59½, these withdrawals are subject to regular income tax but no additional penalties. The amount withdrawn is added to the person’s taxable income for the year and may impact their tax bracket. However, if withdrawals are made before age 59½, they are not only taxed as income, but may also incur a 10% early withdrawal penalty, unless there is an IRS-approved exception.

What do you do with your 401(k) when you retire?

When you retire, it’s possible to leave a 401(k) where it is, take a lump sum, roll it into an IRA or annuity, or begin RMDs. Each option has different tax implications and flexibility, so it’s important to explore each closely and determine which would fit best with your retirement goals and timeline.

Follow RMD schedule for withdrawals from your 401(k)

It's important to understand how RMDs affect you and schedule these distributions from a 401(k) each year to avoid penalties. RMD rules apply to traditional (pre-tax) 401(k) accounts and are designed to ensure that the IRS collects taxes on deferred income. The first RMD must be taken by April 1 of the year after the account holder turns 73, with all subsequent withdrawals due by December 31 each year. Failing to take the required amount can result in a significant tax penalty, up to 25% of the amount that should have been withdrawn.

Take money from your 401(k) before you reach RMD age

In certain circumstances, individuals who are between 55 and 59 ½ may be able to take money from a 401(k) without being penalized. The IRS rule states that if a person leaves or loses their job in the same calendar year as they turn 55 or older, they can begin taking penalty-free withdrawals from their 401(k) as long as they leave the money in that plan. If you have a 401(k) plan with a former employer, those funds can be accessed once you turn 59 ½.

Before taking a lump sum from a 401(k), it’s important to weigh the pros and cons. While a lump sum withdrawal provides immediate access to the full balance and the freedom to use the funds however you choose, the entire amount is treated as taxable income in the year it’s withdrawn and can push the account holder into a higher tax bracket. Plus, cashing out early ends the opportunity for future tax-deferred growth and may significantly reduce the savings available for later in retirement.

Convert your 401(k) after retirement

After retirement, some individuals choose to convert their 401(k) into another retirement vehicle, such as an IRA or an annuity. Rolling a 401(k) into an IRA can offer more investment choices, potentially lower fees, and continued tax-deferred growth.

Rolling over a 401(k) into an annuity can offer the opportunity for continued tax-deferred growth, along with the added benefit of a guaranteed income stream throughout retirement. Annuities can supplement income from pensions, Social Security, and other retirement savings accounts, and help provide greater financial stability and offer peace of mind in the years ahead.

How to supplement your 401(k) income to cover retirement expenses

While a 401(k) can serve as a solid foundation for retirement income, it may not be enough to cover all expenses, especially unexpected ones. Retirees often face unpredictable costs such as rising healthcare bills, long-term care needs, home repairs, or inflation-driven living expenses. That's why it’s important to create a comprehensive retirement plan that includes a variety of income sources.

Since annuities can provide a reliable, guaranteed income stream, they can help cover fixed monthly costs, as well as unexpected expenses. Certain types of annuities can also balance growth potential with protection from market downturns, or provide an income stream for the rest of your life.

Another potential source of supplemental income is a life insurance policy with cash value. Along with providing a death benefit, certain permanent life insurance policies have the option to borrow against or withdraw from the policy’s accumulated cash value and give flexible access to funds when needed.¹ This can be especially helpful in covering day-to-day expenses or unexpected costs without tapping into other retirement accounts or triggering taxes.

Unsure how to make the most of your 401(k) after retirement? Ask Midland National about opportunities for guaranteed income

Navigating retirement income decisions can be complex, but you don’t have to go at it alone. The team at Midland National is here to help you make informed choices to support your long-term financial goals. With a range of annuity and life insurance products, Midland National offers solutions designed to provide guaranteed income, protect your savings, and bring added peace of mind today and into the future.

¹ Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent cash value of the contract exceeds premium paid. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. Policy loans and withdrawals will reduce cash value and death benefit. Policy loans are subject to interest charges. Consult with and rely on your tax advisor or attorney on your specific situation. Income and growth on accumulated cash values is generally taxable only upon withdrawal. Adverse tax consequences may result if withdrawals exceed premiums paid into the policy. Withdrawals or surrenders made during a Surrender Charge period will be subject to withdrawal charges, processing fees, or surrender charges, and may reduce the ultimate death benefit and cash value. Surrender charges vary by product, issue age, sex, underwriting class, and policy year.

B2-MN-11-25