Dear Liz: I turned 70 last week and therefore I am leaving my part-time job after about 13 years. No big deal, but now that I am retiring I have a 401(k) worth about $60,000 and an IRA that is somewhere around $50,000. Should I roll my 401(k) account into my IRA or just let it sit there collecting dust? I do understand that at age 70½ I am supposed to start withdrawing some of the funds, but am not sure how much. It seems 70 years creeped up on me.
Answer: Years have a nasty habit of doing that.
You mentioned that you're retiring because you've achieved a certain age. Few jobs have mandatory retirement ages, though. If you don't retire, you can continue putting off required minimum distributions from your 401(k). You would still have to take minimum distributions from your IRA, unless your employer allows you to roll that money into your 401(k) plan.
But we'll assume you're happy with your decision. Rolling your 401(k) into your IRA isn't necessarily the best option. What you should do next depends on the details of both accounts.
Most large-company 401(k)s allow retirees to take regular distributions, including required minimum distributions, from the plans. These plans also tend to offer low-cost institutional funds that may be a much better deal than those you can access as a retail investor with an IRA. If you've got a good 401(k) that allows retirement distributions, there may be no need to move your money.
If your employer's plan doesn't allow such distributions, don't automatically assume your current IRA provider is the best choice, especially if it's a full-service brokerage or insurance company. Compare the fees of the investment options with what's available from a discount brokerage. Transferring all your retirement money to a lower-cost provider can help you keep more money in your pocket.
Calculating your required minimum distributions isn't difficult. The IRS has tables on its website, and in Publication 590, to help you figure out how much money to withdraw. Various sites have calculators as well.
One caveat: If you keep your IRA and 401(k) separate, you'll have to calculate required minimum distribution separately for each account and withdraw those amounts from each account, says Mark Luscombe, principal analyst for taxes and accounting at Wolters Kluwer. That's different from the rules when you have multiple IRAs. When you have more than one IRA, you calculate the required minimum distribution based on the total of all your IRAs but are allowed to take the distribution itself from any one of them.
How to cut back after spending a windfall
Dear Liz: I inherited a substantial amount of money when a relative died. I put most of it in retirement funds, but as a few stray accounts were found, sometimes I just deposited them in my bank account and lived comfortably on $1,000 to $2,000 over my normal income. I have no debt, but I've grown accustomed to this extra cash. What's the best way to reel back into a lifestyle I can afford on my $62,000 annual salary?
Answer: Those windfalls represented a substantial increase to your regular income, so cutting back may be painful. It's so much easier to ramp up our lifestyles than to crank them back.
Start by tracking your spending. Once you understand your patterns, you can figure out where to cut back.
Don't automatically assume that the luxuries you were able to buy with the extra money are now off limits. If you traveled more and enjoyed it, for example, that should still have a place in your budget. You could cut elsewhere to make sure travel is part of your life. If some of your spending didn't bring you much joy, though, pay attention to that as well. You may have started eating out more only to find your health suffered, or you didn't enjoy it that much, and you'd be fine doing that less often.
Your goal with any spending plan should be identifying which expenditures are important to you and which aren't — then reducing the latter so you can have more of the former.