Dear Savvy Senior.

I am 59 years old and would like to get a better grasp on how to best use my 401(k) account when I retire in three years. Can you give me some simple solutions? My husband passed away last year and he always took care of things like this. I want my money to last as long as possible without paying huge taxes. So, what’s the solution?

401 krazy

Dear 401,

With so many things to consider, it’s difficult to give you any simple solutions, but I can tell you about some possible 401(k) options to consider. I also want to recommend that before you make any decisions regarding your 401(k), talk to a qualified financial planner or tax adviser for help.

401(k) Options

There are many different options for 401(k) withdrawals and every situation is different but a common thread that most people are looking to achieve is how to make their money stretch as far as possible. The withdrawal or distribution options your em-ployer offers depend on the rules for your company’s plan. Here are some of the possibilities:

• Leaving the money in the plan

• Cashing out in a lump sum

• Rolling over a lump sum into an IRA

• Converting to an annuity

• Taking the money in installments

• Using some combination of these

In deciding on a withdrawal plan, you’ll have to weigh such factors as your age, other sources of income, your tax situation and how comfortable you feel investing and managing your money. Here’s the breakdown of possible 401(k) considerations:

Stay Put: Your company may allow you to leave money in the 401(k) plan and withdraw it later. When you turn 70 1/2, however, the IRS requires you to start taking the money out or pay a stiff penalty if you don’t. This option is most attractive if you don’t need the money immediately, because it enables you to stay with investments with which you’re familiar and comfortable.

CashOut: You can choose to take a lumpsum distribution by cashing out your account. Beware! this is a very tempting option because the cash can be invested or spent. IRS ALERT! Also know that if you choose the lumpsum cash out you’ll have to pay income tax on the money you withdraw, and the IRS requires your employer to withhold 20 percent of the lump sum toward that income tax. And, if you’re younger than 55 you will have to pay an additional 10 percent penalty for early withdrawal.

IRA Rollover: To keep from huge taxes, a good alternative is to roll over the lump sum into a traditional IRA at a mutual fund company, stock brokerage, bank, credit union or other financial institution. The great advantage of a rollover is flexibility, be-cause you can invest IRA money in stocks, bonds, mutual funds, CDs, treasury notes and other. instruments and sell them at any time. Savvy Tip: To avoid income tax and penalties, the rollover must be completed within 60 days of the withdrawal from your plan.

Annuities: About 30 percent of plans allow you to convert some or all of your 401(k) assets into an annuity that guarantees regular, fixed payments. An annuity can provide you guaranteed income for the rest of your life and relieve you of the challenge of managing your investments. Annuities come in many for s and options. Choose carefully! Also be aware that when you convert to an annuity, your 401(k) prin-cipal is, in most cases, no longer available to you, after you start receiving payments.

Installments: Some employers allow you to withdraw a percentage of the assets from your 401(k) in installments, most commonly over five, 10 or 15 years. If you’re happy keeping your savings in your em-ployer’s plan and want a steady stream of income but don’t want to be locked into the rules of an annuity, this approach could be right for you.

Combination: You can combine the above options for withdrawing your 401(k) money. This approach enables you to tailor a plan most suited to your needs.

Resources

• Federal Government Consumer Information Center: They offer free pamphlets on investing, saving, retirement planning, 401 (k) plans and annuities. Call 1-888-878-3256 or visit wwwpueblo.gsa.gov.

• Financial Planning Association: Call 1-800-322-4237 or www.fpanet.org.

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit www.savvysenior.org.