Is It Smart to Convert $10k at a Time From My 401(k) to an IRA in Retirement?
Either way, there are plenty of reasons to move your 401(k) into an IRA and preserve the tax advantages that come with retirement accounts.
Taking Advantage of Tax-Advantaged Accounts
Tax-deferred growth is the biggest benefit of saving in tax-advantaged retirement accounts. This allows your money to compound without an annual tax drag, letting the balance increase more quickly. Over the long term, this can lead to a significant accumulation of wealth.
Retirement accounts let you shelter account earnings from current taxes. Investments with the highest growth and earning potential reap the biggest benefit from this tax treatment. Remember, you’ll need that nest egg to fund decades worth of expenses, so you want to give it as much time to grow as you comfortably can.
As you near your retirement age, it makes sense to keep a portion of your retirement accounts in low- or no-risk assets. This can protect the money you will need in the next few years from potential investment losses when you won’t have time for the investments to recover. However, keeping too much money in cash has the potential to undermine your financial security, even though that might seem counterintuitive.
(If you need help determining the right mix of investments and risk your retirement portfolio should have, consider speaking with a financial advisor.)
The Risk of Playing It Too Safe
Keeping retirement accounts in cash may seem like a safe strategy, but it can actually have the opposite effect. Cash may be safe from investment losses, but it’s not safe from the rising cost of living. Inflation eats away at the value of your money: what costs $100 today could cost more than $120 a decade from now. Each dollar you have buys a little bit less as prices rise.
That said, once you’re retired, you will want to keep some of your money in cash or cash equivalents.
Start by figuring out how much money you’ll need in the next three to five years to cover all of your living expenses. Next, figure out how much of those expenses are covered by existing sources of income, such as:
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Non-retirement investments and savings
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Pensions
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Annuities
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Work
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Other income streams (such as royalties or rental income)
Subtract this total income from your expected living expenses to figure out how much you’ll need to withdraw from your retirement accounts. Then, move that portion of your retirement account into no- or very low-risk assets like high yield savings accounts, certificates of deposit (CDs), Treasury securities or money market accounts. While this money likely won’t be growing as much as it would if it was invested in stocks, you’ll still want this money to earn as much interest as possible. Working with a trusted financial advisor can you help you optimize your investment mix to preserve the money you need in the short term and continue growing the money you’ll need for a secure future.
Bottom Line
Balancing the need for immediate cash and long-term growth is an important aspect of retirement planning. By carefully assessing your income streams and anticipated expenses, you can strategically allocate your retirement savings to ensure both security and growth.
Tips for Finding a Financial Advisor
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If you’re in the market for a financial advisor, there’s a lot that goes into finding the right professional to work with. Start by learning about the various types of advisors, as well as the services they provide, how they’re compensated and the types of questions you should be asking to vet potential matches. This process can feel overwhelming, which is why SmartAsset put together a comprehensive guide for how to find and choose a financial advisor.
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Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Michele Cagan, CPA, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email
Please note that Michele is not a participant in the SmartAsset AMP platform, nor is she an employee of SmartAsset. She has been compensated for this article.
Photo credit: ©iStock.com/JohnnyGreig, ©iStock.com/DNY59
The post Ask an Advisor: I’m Already Retired But I’ve Been Converting $10k at a Time From My 401(k) to an IRA. Is This Wise? appeared first on SmartReads by SmartAsset.
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