What Should You Do With Your 401(k) When You Retire?

After decades of diligently contributing to your 401(k), you’ve reached retirement with a substantial nest egg—perhaps $500,000, $1 million, or even more. This account represents years of saving, employer matches, and investment growth.

Now comes a critical question that will affect your financial security for the rest of your life: What should you do with this money?

You have several options: leave it in your former employer’s 401(k) plan, roll it over to an Individual Retirement Account (IRA), convert some or all of it to a Roth IRA, take a lump-sum distribution, or use some combination of these strategies.

Each choice has significant implications for your taxes, investment options, fees, withdrawal flexibility, and overall retirement income strategy. Making the wrong decision could cost you tens of thousands of dollars—or more—over the course of your retirement.

Yet many people make this decision hastily, based on a single phone call with their 401(k) provider or advice from someone who doesn’t understand their complete financial situation. According to a 2023 study by the Investment Company Institute, approximately 40% of workers cash out at least some of their retirement savings when changing jobs or retiring, triggering immediate taxes and penalties and devastating their long-term financial security.

The reality is there’s no universal “right answer” for everyone. The best choice depends on your specific situation: your age, tax bracket, investment knowledge, the quality of your 401(k) plan, whether you’re still working, your other assets, and your overall retirement strategy.

This comprehensive guide will walk you through your options, explain the pros and cons of each approach, and help you make an informed decision about what to do with your 401(k) when you retire.

Understanding Your 401(k) Options at Retirement

When you retire or leave your employer, you typically have four main options for your 401(k):

Option 1: Leave It in Your Former Employer’s Plan

If your 401(k) balance exceeds $7,000 (the 2024 threshold), your former employer must allow you to keep your money in their plan indefinitely.

How it works:

• Your money stays invested in the plan
• You maintain the same investment options
• You can take withdrawals according to plan rules
• No immediate tax consequences
• No rollover process required

Who this might work for:

• People satisfied with their plan’s investment options
• Those with low-cost institutional funds in their 401(k)
• Individuals who retired between ages 55-59½ (Rule of 55 applies)
• People with significant company stock (NUA strategy possible)
• Those who value simplicity and want to avoid decisions

Option 2: Roll Over to an IRA

You can transfer your 401(k) balance to a traditional IRA, maintaining the tax-deferred status.

How it works:

• Open an IRA at a brokerage, bank, or robo-advisor
• Request a direct rollover from your 401(k) provider
• Money transfers directly from 401(k) to IRA
• No taxes or penalties if done correctly
• Full control over investments

Who this might work for:

• People wanting broader investment choices
• Those who want to consolidate multiple retirement accounts
• Individuals seeking lower fees
• People who want more withdrawal flexibility
• Those planning sophisticated tax strategies

Option 3: Convert to a Roth IRA

You can roll over your traditional 401(k) to a Roth IRA, paying taxes now in exchange for tax-free growth and withdrawals later.

How it works:

• Roll over 401(k) to a Roth IRA
• Pay income taxes on the entire amount converted
• Future growth and qualified withdrawals are tax-free
• No Required Minimum Distributions (RMDs) during your lifetime
• Can be a multi-year strategy (partial conversions)

Who this might work for:

• People in lower tax brackets now than expected in the future
• Those with other funds to pay the conversion taxes
• Individuals wanting tax-free income in retirement
• People concerned about future tax rate increases
• Those wanting to leave tax-free inheritance to heirs

Option 4: Take a Lump-Sum Distribution

You can withdraw the entire balance, though this is rarely advisable.

How it works:

• Request full distribution from your 401(k)
• Entire amount is taxable as ordinary income
• Potentially massive tax bill
• 10% early withdrawal penalty if under age 59½
• Money no longer grows tax-deferred

Who this might work for:

• Almost no one
• Only in extreme financial emergencies
• Even then, partial withdrawals are usually better

Why this is usually a terrible idea:

Meet Steven, age 62, with $600,000 in his 401(k):

If he takes a lump-sum distribution:

• Taxable income: $600,000
• Federal tax (assuming 35% bracket after deductions): ~$180,000
• State tax (assuming 5%): ~$30,000
• Net after taxes: ~$390,000
• Lost future growth on $210,000 paid in taxes

If he had left it invested at 6% for 20 years:

• That $210,000 in taxes would have grown to $673,000
• Total cost of the lump-sum decision: $673,000 in lost wealth

The bottom line: Unless you have an extraordinary reason, never take a lump-sum distribution of your entire 401(k).

Option 5: Combination Approach

You can split your 401(k) among multiple options.

Examples:

• Roll 80% to traditional IRA, convert 20% to Roth IRA
• Leave half in 401(k), roll half to IRA
• Take small distribution for immediate needs, roll over the rest
• Convert portions to Roth over several years

This flexibility allows you to optimize for multiple goals: tax management, investment control, and income planning.

Leave It or Move It? Key Factors to Consider

Deciding whether to leave your 401(k) with your former employer or roll it over requires evaluating several important factors.

Factor 1: Investment Options and Quality

401(k) plans typically offer:

• Limited menu of investment options (often 10-30 funds)
• Institutional share classes (often lower fees than retail)
• Target-date funds
• Sometimes company stock
• Rarely individual stocks or bonds

IRAs typically offer:

• Thousands of mutual funds
• Individual stocks and bonds
• ETFs (Exchange-Traded Funds)
• REITs, commodities, alternatives
• More sophisticated investment strategies
• Complete flexibility

Meet Jennifer, age 64, evaluating her $750,000 401(k):

Her 401(k) offers:

• 18 mutual fund options
• Expense ratios: 0.05% to 0.75%
• Good selection of index funds
• Limited bond fund choices
• No individual stock options

IRA would offer:

• Thousands of fund options
• Expense ratios: 0.03% to 2.00%+
• Individual stocks and bonds
• Municipal bonds (tax-free income)
• More international options

Jennifer’s analysis:

• Her 401(k) has excellent low-cost index funds
• She doesn’t need thousands of options
• She values simplicity
• Decision: Leave it in the 401(k) for now

Contrast with Michael, age 66:

His 401(k) offers:

• 12 actively managed funds
• Expense ratios: 0.65% to 1.25%
• No index fund options
• Limited bond choices
• High fees

IRA would offer:

• Low-cost index funds (0.03-0.10%)
• Better bond fund selection
• More diversification options

Michael’s analysis:

• His 401(k) fees are 0.80% higher than available IRA options
• On $500,000, that’s $4,000/year in extra fees
• Over 20 years: $80,000+ in savings by moving to lower-cost IRA
• Decision: Roll over to IRA

Key questions to ask:

• What are the expense ratios of your 401(k) funds?
• Do you have access to low-cost index funds?
• Are the investment options sufficient for your strategy?
• Would you benefit from more choices?

Factor 2: Fees and Costs

Beyond investment expense ratios, retirement accounts have other fees.

401(k) fees can include:

• Administrative fees (often $25-100/year for former employees)
• Record-keeping fees (0.10-0.50% of assets)
• Investment management fees (expense ratios)
• Transaction fees for trades
• Loan fees (if available)

IRA fees can include:

• Account maintenance fees ($0-50/year, often waived with minimum balance)
• Trading commissions ($0 at most major brokers now)
• Investment expense ratios
• Advisory fees if using a financial advisor (0.25-1.50%)

The fee comparison:

Large company 401(k) (good plan):

• Administrative fees: $0 (absorbed by employer)
• Investment fees: 0.05-0.15% (institutional funds)
• Total: ~0.10%/year on $500,000 = $500/year

Small company 401(k) (expensive plan):

• Administrative fees: $75/year
• Record-keeping: 0.35%
• Investment fees: 0.75%
• Total: ~1.10%/year on $500,000 = $5,575/year

Low-cost IRA (self-directed):

• Account fee: $0
• Investment fees: 0.05-0.10% (index funds/ETFs)
• Total: ~0.08%/year on $500,000 = $400/year

IRA with financial advisor:

• Advisory fee: 1.00%
• Investment fees: 0.10%
• Total: ~1.10%/year on $500,000 = $5,500/year

The impact of fees over time:

$500,000 growing at 6% for 20 years:

• At 0.10% fees: Grows to $1,540,738
• At 0.50% fees: Grows to $1,432,098
• At 1.10% fees: Grows to $1,311,705

Difference between lowest and highest fees: $229,033

Fees matter enormously. A seemingly small difference of 1% annually can cost you hundreds of thousands of dollars over a retirement.

Action step: Request a fee disclosure document from your 401(k) provider and compare it to IRA options you’re considering.

Factor 3: The Rule of 55

This is one of the most important—and often overlooked—considerations for early retirees.

The Rule of 55 allows:

• Penalty-free withdrawals from your 401(k)
• If you leave your employer in or after the year you turn 55
• Only applies to the 401(k) from that specific employer
• Does NOT apply to IRAs

Meet Patricia, age 57, who retired at 56:

Patricia’s situation:

• 401(k) balance: $650,000
• Needs $35,000/year from retirement accounts until Social Security at 62

Other savings: $100,000 in taxable account

Option A: Leave money in 401(k)

• Can withdraw $35,000/year penalty-free (Rule of 55 applies)
• Pays ordinary income tax only
• Annual tax on $35,000: ~$4,200 (assuming 12% bracket)

Option B: Roll over to IRA

• Withdrawals before 59½ subject to 10% penalty
• Annual penalty on $35,000: $3,500
• Plus income tax: $4,200
• Total: $7,700/year
• Extra cost over 3 years until age 59½: $10,500

Patricia’s decision: Leave money in 401(k) until age 59½, then reassess rollover options.

Important Rule of 55 details:

• Must separate from employer in or after the year you turn 55
• Doesn’t apply if you left employer before age 55, even if you’re now 55+
• For public safety employees (police, firefighters), it’s the Rule of 50
• Only applies to current employer’s 401(k), not old 401(k)s from previous jobs
• Once you roll to IRA, you lose this benefit forever

If you retire between 55 and 59½ and need to access your 401(k), the Rule of 55 is a compelling reason to leave your money in the plan, at least temporarily.

Factor 4: Creditor Protection

Retirement accounts have different levels of legal protection from creditors and lawsuits.

401(k) protection:

• Unlimited federal protection under ERISA
• Protected in bankruptcy
• Protected from most creditors and lawsuits
• Very strong protection in all states

IRA protection:

• Federal bankruptcy protection up to $1,512,350 (2024 limit, adjusted for inflation)
• State law governs protection outside bankruptcy
• Varies significantly by state
• Some states offer unlimited protection
• Other states offer limited or no protection

Who should care:

• Business owners (higher lawsuit risk)
• High-net-worth individuals
• Professionals in litigious fields (doctors, lawyers)
• Anyone concerned about creditor claims

Meet Dr. Robert, age 63, orthopedic surgeon:

Robert’s situation:

• 401(k): $1.8 million
• Concerned about malpractice liability
• Lives in a state with limited IRA protection

His analysis:

• 401(k) offers unlimited federal ERISA protection
• IRA protection in his state: only $500,000
• Potential exposure: $1.3 million

Decision: Leave money in 401(k) for maximum asset protection

For most people, this isn’t a major concern. But if you have significant assets and creditor risk, 401(k) protection can be valuable.

Factor 5: Required Minimum Distributions (RMDs)

Both 401(k)s and traditional IRAs require RMDs starting at age 73 (for those born 1951-1959) or age 75 (born 1960 or later).

401(k) RMD special rule:

• If you’re still working at age 73+, you can delay RMDs from your current employer’s 401(k)
• Only applies if you don’t own 5%+ of the company
• Does NOT apply to old 401(k)s from previous employers
• Does NOT apply to IRAs

IRA RMDs:

• Must begin at age 73 (or 75) regardless of work status
• No exception for continuing to work
• Applies to all traditional IRAs combined

Meet Thomas, age 72, still working part-time:

Thomas’s situation:

• Current employer 401(k): $300,000
• Old 401(k) from previous employer: $400,000
• Traditional IRA: $200,000
• Still working, doesn’t need the money

Option A: Leave old 401(k) where it is, keep current 401(k)

• Must take RMDs from old 401(k) at age 73
• Must take RMDs from IRA at age 73
• Can delay RMDs from current employer 401(k) while still working

Option B: Roll old 401(k) into current employer’s 401(k) (if plan allows)

• Can delay RMDs on all 401(k) money ($700,000) while still working
• Still must take RMDs from IRA
• Saves significant taxes by delaying larger RMD

Option C: Roll everything to IRA

Must take RMDs on entire $900,000 at age 73
Loses ability to delay RMDs by continuing to work
Higher taxable income, potentially higher Medicare premiums

If you plan to work past age 73, keeping money in your current employer’s 401(k) (and potentially rolling old 401(k)s into it) can provide valuable RMD flexibility.

RetirementView helps you model RMD requirements under different scenarios, showing exactly how much you’ll need to withdraw each year and the tax implications of various rollover strategies.
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