Good Question on 401-k Distribution.

Yesterday I had someone e-mail me about what they considered their soon to come distribution of 401-k money at 59.5 years of age. I expect many people are confused by this rule.  

 

You do not have to take a contribution from your 401-k or IRA at 59.5. You can of course and past that age can basically take out all of it or any portion of it you need for living expenses. But unless you actually need this money for expenses the best course is to leave it alone and let it accumulate tax free for as long as you can.  Only at age 70.5 are you required to begin minimum distributions from your retirement assets in these accounts. There is a formula to go by and your tax advisor can provide it or you can find it on the web, but the formula starts out at some under 4% of the assets in ALL your 401-k or IRA accounts. One other point if you are still working at age 70.5 other rules apply and you need to check them out.  The reasoning here is of course any assets distributed to you are considered taxable.

 

The added accumulation of tax deferred money in your 59.5 to 70.5 year old retirement account will likely be significant as well since in basically 11 years you should no less than double your assets there. Of course if you are still working during that time you can continue to contribute to your account.

 

 If you have your assets in a former employers trust or even in some mutual funds I highly suggest you consider moving your funds to Vanguard. Vanguard is the least expensive mutual fund group out there and is owned by the investors who have funds there. The service is top notch as well. Yes, your current manager or broker will not like this advice, but ignore them as your interests are paramount here. Saving the up to 1% annually in expenses can add up to significantly more money in your account when you do tap it and will keep more in your account as you tap it. Also consider the funds you have your assets in as well. Once past 59.5 years loss of principal becomes more important than growth of principal so consider good corporate bond funds and blue chip stocks as your best choices. I really like Vanguard Wellesley personally as a major choice here, not your only choice of course.

 

Full disclosure my IRA assets are in Vanguard as well as Wellesley fund. I get no consideration from Vanguard now or in the past.