As the title says, how does this work ? Does one simply receive what they put in? For example, if a person has 100k when they retire at 67, does the retirement company choose an estimated year of death and divide the 100k by the number of years? Are there levels, for example if you retire with 100k, you receive this amount a month? Are distributions distributed like social security?
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You choose how much to take out and when.
When you take money out; it counts as income and you’ll owe taxes
Leaving money in keeps the tax protections on dividends,interest, capital gains
It’s not worth worrying too much about unless retirement is close….tax laws and withdraw regulations are subject to change over the next few decades (as they always are)
You choose how much to sell to cash out. The general rule is 4%, so if you want $50k/yr (and adjust for inflation after) then you need $1.25M.
You are thinking of a pension, or defined benefit retirement plan, where you contribute, and your employer contributes, and at retirement age you get a monthly check for the rest of your life. Social security works like this, too. In a 401k, AKA a defined contribution plan, you and potentially your employer contributes, you decide where to invest, and at retirement age you withdraw whatever you want and pay taxes on what you take out. If you die, any remaining balance goes to your beneficiaries after taxes are deducted. There are required minimum distributions imposed on 401 k participants at certain ages , however as the government does not want to wait for ever for its tax revenue.
It is like a bank account. You decide how much and when you want to take money out. Only thing to know is once you hit a certain age, usually 72 or 73, you have to take a required minimum distribution. This is kind of like what you were thinking, the IRS has public tables for any given age. You take your balance from prior year end, divide it by that number, and that’s the minimum you have to take out (because the IRS wants its money). After that you can take as much or as little as you want.
Before 72/73 and after age 59.5, it is totally up to you. Roth IRAs are the same except they don’t have required minimum distributions, so you can die without taking a dime out if you want. Popular way to pass assets down to your kids in a tax efficient way.
A 401k is what’s called tax deferred. Meaning your company will put in pre-tax dollars, which can then grow in investment porfolio. You pay taxes on it when you take it out. But the idea is that you take it out when you retire, so no income, and thus are in a lower tax bracket. Also the 401k can grow using pre-tax dollars, and compound interest is a magical motherfucker.
The other common retirement distribution is a Roth IRA. It’s almost like the reverse of a 401k. You put in after tax dollars, but you don’t pay taxes when you take it out, even on the gains. The caveat is there is max yearly contribution limit.
And with both these distributions, it’s possible to take your money out before retirement, but doing so can sometimes cause a penalty or increased tax burden.
As for paying out during retirement, that’s entirely on the onus of the owner. You can take however much you want out, whenever you want. But like mentioned earlier, it can affect taxes owed.
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