Turning your 401(k) into income
Most people check their 401(k) balance; fewer know what they can do with it when they change jobs or retire. Here are the usual options and how to compare the income investments you could hold.
Your main choices
- Leave it in the old plan – simplest, but the menu is limited to the plan's funds.
- Roll it into an IRA – a direct rollover keeps the tax deferral and opens up individual Treasuries, bonds, funds and more (see IRS rollover rules).
- Move it into a new employer's plan, if that plan accepts rollovers.
- Cash out – usually taxed as ordinary income, and before 59½ often with a 10% additional tax.
Income inside versus outside the account
Inside a 401(k) or traditional IRA, interest and dividends are not taxed until you withdraw, so the after-tax ranking of an investment is different from a taxable account. Withdrawals are generally taxed as ordinary income, and required minimum distributions start at the age set by the IRS. In a taxable account the type of income matters a lot: Treasury interest is free of state tax, most municipal bond interest is free of federal tax, qualified dividends get lower rates.
Find income options for the money
IncomeGrid has 40,000+ investment options screened – Treasuries, agency, municipal and company bonds, bond and money-market funds, REITs and SEC-filed offerings – sorted by yield and a risk level from 1 to 5. IncomeGrid ranks every item by yield after tax for where you live: federal, state and each investment type (Treasuries, municipal bonds, corporate bonds, funds, REITs and filed offerings are each taxed differently).
Sources
- IRS – Rollovers of retirement plan distributions
- IRS – Retirement topics: required minimum distributions
- U.S. Treasury – Daily Treasury par yield curve rates
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