You've spent 20, 30, maybe 40 years contributing to your 401(k). It's been automatic: money comes out of your paycheck, goes into your account, and you barely think about it.
Then you retire.
And suddenly you're faced with a decision that feels way more complicated than it should: What do I actually DO with this money now?
Your former employer sends you paperwork with options that sound like a foreign language. Your brother-in-law has an opinion. A financial advisor cold-called you last week with a pitch. Everyone seems to have advice, but nobody's explaining it in plain English.
Let's fix that.
If you're retiring or recently retired and you're trying to figure out what to do with your 401(k), here's what you need to know.
Your Four Main Options
When you retire, you typically have four choices for your 401(k):
- Roll it over to an IRA
- Leave it with your former employer
- Roll it into your new employer's 401(k) (if you're changing jobs, not fully retiring)
- Take a lump-sum distribution (cash it out)
Let's break down each one, the pros and cons, and when each option might make sense.
Option 1: Roll It Over to an IRA
This is the most common choice for retirees, and for good reason.
What it means: You move your 401(k) balance from your employer's plan into an Individual Retirement Account (IRA) that you control. This is typically a tax-free transfer if done correctly (a "direct rollover").
Pros:
- More investment choices - 401(k) plans usually offer 10 to 30 investment options. An IRA at a place like Fidelity, Vanguard, or Schwab gives you thousands of options: stocks, bonds, ETFs, mutual funds, CDs, and more.
- Lower fees - Many 401(k) plans have high administrative fees or expensive fund options. IRAs often have lower-cost investment choices.
- Consolidation - If you have multiple old 401(k)s from previous employers, you can roll them all into one IRA. Makes life simpler.
- More control - You decide where the account is held, what it's invested in, and how it's managed.
- Easier estate planning - IRAs typically offer more flexibility for beneficiary designations and inherited IRA options.
- Flexibility for withdrawals - You can set up systematic withdrawals on your schedule, not your former employer's rules.
Cons:
- No loan option - Unlike a 401(k), you can't borrow from an IRA.
- Creditor protection varies by state - 401(k)s have strong federal creditor protection. IRAs have protection too, but it varies by state law.
- Required Minimum Distributions (RMDs) start at 73 - Same as a 401(k), but worth noting.
When it makes sense:
- You want more investment options and lower fees
- You're consolidating multiple retirement accounts
- You want simplicity and control
- You're working with a financial advisor who will help you manage the IRA
How to do it: Contact the company where you want to open your IRA (Fidelity, Vanguard, Schwab, etc.). They'll initiate a "direct rollover" from your 401(k). Your 401(k) provider cuts a check made payable to your new IRA custodian. You never touch the money, so there are no taxes or penalties.
Important: Make sure it's a direct rollover, not an indirect rollover where the check is made out to you. If you take possession of the money, 20% will be withheld for taxes, and you'll have 60 days to deposit it into an IRA or face taxes and penalties.
The IRS has more details on rollovers here.
Option 2: Leave It with Your Former Employer
You might not need to do anything. Many 401(k) plans allow you to leave your money in the plan after you retire.
What it means: Your account stays where it is. You're no longer contributing, but the money remains invested in your former employer's 401(k) plan.
Pros:
- Zero effort - You don't have to do anything. The money stays put.
- Creditor protection - 401(k)s have strong federal protection from creditors and lawsuits.
- Potentially lower fees - If your employer has a large plan with institutional pricing, the fees might actually be lower than what you'd pay in an IRA (though this is rare).
- Access to unique investments - Some 401(k) plans offer institutional funds or options you can't get in an IRA.
- Delayed RMDs (if you're still working) - If you're still working part-time and participating in a 401(k), you can delay RMDs on that account until you fully retire. This doesn't apply if you own 5% or more of the company.
Cons:
- Limited investment options - You're stuck with whatever funds the plan offers.
- Plan could change or terminate - Employers can change providers, reduce investment options, or terminate the plan. If that happens, you'll be forced to move the money anyway.
- Harder to manage in retirement - If you're taking withdrawals from multiple accounts, having money scattered makes planning more complicated.
- Less control over beneficiaries - 401(k) beneficiary rules can be more restrictive than IRAs, especially for non-spouse beneficiaries.
- You might forget about it - Seriously. People leave old 401(k)s behind and lose track of them.
When it makes sense:
- Your 401(k) plan has excellent, low-cost investment options
- You value the strong creditor protection
- You're not in a rush to consolidate and you're comfortable with the status quo
- You're still working part-time and want to delay RMDs
What to watch out for: Some plans charge higher fees to former employees or limit services. Read the plan's rules for terminated participants.
Option 3: Roll It Into Your New Employer's 401(k)
If you're changing jobs (not fully retiring), you might be able to roll your old 401(k) into your new employer's plan.
What it means: You transfer your old 401(k) balance into your new company's 401(k) plan.
Pros:
- Consolidation - Everything in one place.
- Continued creditor protection - Federal protection stays intact.
- One set of rules - Easier to track contribution limits, RMDs, and loans if everything's in one plan.
Cons:
- Limited to new plan's options - You're stuck with whatever investments the new plan offers.
- Not all plans allow roll-ins - Check with your new employer's HR department.
When it makes sense:
- You're changing jobs, not retiring
- Your new plan has better investment options or lower fees than your old plan
- You value simplicity and consolidation
For retirees: This typically doesn't apply unless you're doing part-time or consulting work with a new employer that offers a 401(k).
Option 4: Take a Lump-Sum Distribution (Cash It Out)
This means you withdraw the entire 401(k) balance and take the cash.
Important: This is almost never a good idea. Here's why.
What happens:
- The entire distribution is treated as taxable income in the year you take it
- If you're under 59½, you'll also pay a 10% early withdrawal penalty (with some exceptions)
- You could easily be pushed into a higher tax bracket
- You lose the tax-deferred growth potential of that money
Example: Let's say you have $500,000 in your 401(k) and you're 60 years old. If you cash it all out:
- $500,000 is added to your taxable income for the year
- You could easily be in the 32% or even 37% federal tax bracket
- That's $160,000 to $185,000 in federal taxes alone (not counting state taxes)
- You'd walk away with maybe $300,000 to $330,000 after taxes
- That's a massive, unnecessary tax bill.
When it might make sense:
- You have a very small balance (under $5,000) and it's not worth the hassle of managing
- You have an urgent, short-term financial need (medical emergency, etc.) and no other options
- You're facing significant creditor issues and need to access the funds (though this is rare)
For almost everyone else: Don't do this. Roll it over to an IRA or leave it in the plan.
Special Considerations
If You Have Company Stock (NUA)
If your 401(k) includes company stock, there's a special tax strategy called Net Unrealized Appreciation (NUA) that might save you a lot of money. It's complex and requires careful planning, but it can be worth exploring. This is one area where working with a financial advisor or CPA is especially valuable.
More info from the IRS on NUA here.
If you're between 55 and 59 and a half
There's a special rule: if you retire (or are laid off) in the year you turn 55 or later, you can take penalty-free withdrawals from your 401(k). This is called the "Rule of 55."
If you roll your 401(k) into an IRA, you lose this benefit. IRA withdrawals before 59 and a half are subject to the 10% penalty (with some exceptions).
If you think you'll need access to the money before 59 and a half, you might want to leave it in your 401(k) temporarily.
RMDs Start at 73
Whether your money is in a 401(k) or an IRA, you'll have to start taking Required Minimum Distributions at age 73 (as of 2024, thanks to the SECURE 2.0 Act). The IRS requires you to withdraw a certain percentage each year and pay taxes on it.
Exception: If you're still working and don't own 5% or more of the company, you can delay RMDs on your current employer's 401(k) until you retire.
More on RMDs from the IRS here.
How to Actually Do a 401(k) Rollover (The Operational Steps)
If you decide to roll your 401(k) into an IRA, here's what the process actually looks like:
Step 1: Choose where you want your IRA Pick a custodian—Fidelity, Vanguard, Schwab, etc. (Or work with a financial advisor who can help you set it up.)
Step 2: Open your IRA This usually takes 10-15 minutes online. You'll need basic info: Social Security number, address, beneficiaries.
Step 3: Contact your new IRA custodian Tell them you want to do a rollover from your 401(k). They'll walk you through the process and often handle most of the paperwork.
Step 4: Request a direct rollover from your 401(k) Contact your former employer's 401(k) provider (the number is on your statement). Request a "direct rollover" to your new IRA. They'll ask for your new IRA account information.
Step 5: Wait for the check Your 401(k) provider will issue a check made payable to your IRA custodian (e.g., "Fidelity FBO [Your Name]"). This can take one to three weeks.
Step 6: Deposit the check Send or deliver the check to your IRA custodian. They'll deposit it into your account.
Step 7: Invest the money Once the funds settle, you'll need to choose investments. By default, the money usually sits in a money market fund until you decide how to invest it.
Common mistakes to avoid:
- Taking an indirect rollover (check made out to you) and missing the 60-day deadline
- Forgetting to invest the money once it's in the IRA (it won't automatically invest itself)
- Rolling over Roth 401(k) money into a traditional IRA (keep Roth money in a Roth IRA)
The Bottom Line
For most retirees, rolling your 401(k) into an IRA is the simplest, most flexible option. You get more investment choices, lower fees, easier consolidation, and full control.
But there are situations where leaving it in your 401(k) makes sense, especially if you have a great plan with low fees or you need access to the Rule of 55.
What you probably shouldn't do: cash it out and take the tax hit.
If you're not sure which option is right for your situation, this is exactly the kind of decision where having a fiduciary advisor in your corner makes a difference. We can walk through your specific situation, run the numbers, and help you actually execute the rollover so it's done correctly.
Frequently Asked Questions
Q: How long do I have to decide what to do with my 401(k) after I retire?
A: There's no strict deadline, but don't wait too long. Some plans charge higher fees for former employees, and you want to make an intentional decision rather than letting inertia decide for you.
Q: Can I roll over part of my 401(k) and leave the rest?
A: Usually, yes. You can do a partial rollover. Check your plan's rules.
Q: What's the difference between a traditional IRA and a Roth IRA for rollovers?
A: If you roll a traditional 401(k) into a traditional IRA, there are no taxes (it's a direct transfer). If you roll a traditional 401(k) into a Roth IRA, it's a Roth conversion and you'll owe taxes on the full amount in the year of the conversion.
Q: Can I roll my 401(k) into my spouse's IRA?
A: No. Each person's retirement account is individual. However, if you inherit a 401(k) or IRA from a spouse, different rules apply.
Q: What happens if I lose track of an old 401(k)?
A: It happens more than you'd think. Start by contacting your former employer's HR department. If that doesn't work, try the National Registry of Unclaimed Retirement Benefits or your state's unclaimed property database.
Q: Do I have to pay taxes on a 401(k) rollover to an IRA?
A: No, as long as it's a direct rollover (trustee-to-trustee transfer). The money moves from your 401(k) to your IRA without you touching it, so there are no taxes or penalties.
Q: Should I roll my Roth 401(k) into a Roth IRA?
A: Usually, yes. Roth IRAs have no RMDs during your lifetime (unlike Roth 401(k)s), so rolling it over gives you more flexibility. Plus, you consolidate your accounts.
Q: What if my 401(k) balance is really small, like under $5,000?
A: Your former employer might actually force you out of the plan. If your balance is under $1,000, they can cash it out and send you a check. If it's between $1,000 and $5,000, they can roll it into an IRA on your behalf (often a default IRA with high fees). Better to be proactive and roll it over yourself to a custodian you choose.
Important Disclosure: The information provided in this article is for general educational purposes only and should not be considered personalized financial advice. Every individual's financial situation is unique, and what may be appropriate for one person may not be suitable for another. Before making any financial decisions, you should consult with a qualified financial advisor who can review your specific circumstances. This content does not create a client-advisor relationship.
