Lots of retirees have a tough time making the switch from a regular paycheck to some sort of regular income from their retirement accounts—and often it's the rules governing their 401(k)s that can cause them all sorts of problems.
That's according to a report in Money, which points out that many plans require that participants withdraw the entire balance rather than making partial withdrawals.
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That's a big problem for a number of reasons. Many people have most, if not all, of their retirement savings in a 401(k), so trying to figure out how to convert those savings into a monthly source of funds could mean they end up withdrawing the lot and putting it into an IRA—where investments may cost more than they did in the 401(k), thus costing the retiree potential income down the road.
Another potential drain on retirement money is the possibility that investments with relatively high yields, like stable value funds, might not be available either—and that too could siphon away potential returns.
And even the federal government's Thrift Savings Plan hamstrings employees when it comes to taking money out. At the moment, federal employees can only take one partial distribution while they're still working and meet age requirements. Any distribution once they've left their government job has to take out the full remaining balance.
And people who have already left their government jobs and meet age requirements but haven't yet taken a distribution will be allowed a single partial distribution, after which they have to take out the full balance.
But there's a move underway to loosen the restrictions on distributions from the federal plan, so that people have more options and can consider sticking with a plan that offers lower-cost investments. Senators Rob Portman, R-Ohio, and Tom Carper, D-Del., have introduced the TSP Modernization Act, which would change distribution rules for the first time since the TSP was established in 1986.
If the TSP is changed, other plans can't be far behind.
But workers should look long and hard at options offered in IRAs in the meantime; if they end up having to roll over a 401(k) in order to be able to take partial withdrawals, they need to be sure they're getting the best deal possible—on both investments and any fees.
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