Retiring What to do with your 401K how to avoid paying taxes on withdrawl

401K plans which have been very common throughout United States are meant to provide security for millions of Americans in their retirement age. Government gives you an incentive by letting you set aside some income toward your retirement while deferring your taxes on that income. In other words you do not pay any taxes on the amount you contribute. Although you need to pay taxes on the amount you withdraw after you retire, but the taxes you pay vary from negligible amount to lot less than you would have paid if you did not contribute.

This depends upon the careful planning before you retire. I will explain below.

At retirement you have large sum of money. When you separate from the company you need to take out your 401K amount. How should you proceed to avoid taxes.

Things to do:

1. Roll over you 401K amount into IRA account Depending upon your risk factor, tolerance level and age you want to choose IRA cd's or mutual fund or any other vehicle. This rollover should be direct rollover, which means it should be done through trustee of both the plans. Talk to your 401K plan administrator at work and have them directly send to where ever you are having your IRA set up. Do not get cash from the company to deposit in your IRA otherwise you will have to pay 20% tax. Although you will get this tax back but it will be next year or so.

2. Always, always name your beneficiary. Unexpected things happen, so make sure you have beneficiary listed. Also list your contingent beneficiary. If you want to leave money to your loved ones in different amount you can also specify percentages for the beneficiaries. Most appropriate way to do is to set up as many IRA's in different amount as many you have beneficiaries. This way, no confusion arises between the beneficiaries.

3. After you have set up your IRA in step 1, you can start taking distribution at 59 1/2 if you wish or RMD (required mandatory distribution) starting your age 70 1/2. If you do not take RMD starting at 70 1/2, you will be penalized. How much the required amount be depends upon life expectancy and the value of the IRA amount. This link below has a table which could be utilized to see what the RMD is.

4. You can go one step further, look at all your income and project the future income tax you need to pay in coming years. Then decide how much to withdraw every year to minimize your tax