What to Do With Your 401(k) When You Retire

One of the most important decisions that newly retired people must make is what to do with the money in a 401(k) plan that their employer sponsored. In most cases, you have the option to keep your 401(k) with your previous company or transfer it to a personal retirement account. Although IRAs often provide additional investment alternatives and keep the tax benefits of a 401(k) plan, there are times when it’s wise to keep your money in the 401(k) plan instead.

When you retire, you can use your 401(k) in the following ways:

You are exempt from paying taxes on 401(k) payouts after you reach the age of 59 1/2.
Early, penalty-free withdrawals are available to those who leave their jobs at 55 or older.
Unless you are actively seeking employment, you are no longer exempt from the mandated minimum payouts once you reach the age of 72.
Do what you can to keep expenses down.
Think about what your 401(k) plan can do for you financially.
The funds in your 401(k) may be better left alone.
You should think about transferring your funds to an individual retirement account.

Pension Plan Distributions Can Begin

You can begin drawing distributions from your 401(k) without incurring the early withdrawal penalty if you reach the age of 59 1/2 or older. All distributions from a standard 401(k) plan are subject to income tax.

Think About the 55-and-Up Rule

Withdrawals from your 401(k) may begin at the age of 55 without penalties if you leave your job in the year you reach 55 or later. Still, you’ll have to hold off until 59 1/2 to avoid paying the 10% early withdrawal penalty if you transfer the money to an IRA.

Get the Minimum Distributions Necessary

You are required to take out the minimum amount from your 401(k) plan every year if you are 72 years old or older. “You don’t have to touch the 401(k) until you are 72,” advises Glen Hedrick of Old North State Wealth Management in Wilmington, NC. If your plan allows it and you don’t own 5 percent or more of the company, you may be able to continue deferring taking money out of your 401(k) until you turn 72. “You don’t have to take mandatory distributions until you actually leave,” according to Hedrick.

Money taken out of a traditional retirement account is considered income. In order to minimize the tax impact, you need to carefully consider when you will start receiving the payouts. A fee-only financial planner or accountant can assist you in determining the best method for beginning to draw down your assets and in gaining insight into the tax implications of your choices.

Limits Expenses

Look into the 401(k) plan’s investing and administration fees. Your yearly 401(k) fee disclosure statement should have all the information you need to see what fees are being charged to your plan. It is possible that you can transfer your savings to funds within the plan that have reduced costs. Additionally, you have the option to compare the 401(k) plan’s fees and investment charges with those of other IRAs. If you work for a big business, your company might have gotten a good deal on the plan administrator’s expenses. You may be able to locate a more cost-effective IRA if the fees associated with your 401(k) plan are too expensive.

Assess Potential Investments

There is usually a small range of investments available in 401(k) programs. You shouldn’t bother switching if you’re content with the investments that are offered. On the other hand, compared to 401(k) plans, IRAs offer a more diverse range of investing opportunities.

In contrast to an individual retirement account (IRA), which can offer a wide variety of investment options such as bonds, mutual funds, individual stocks, and exchange-traded funds (ETFs), a standard 401(k) plan may only offer a handful of funds.

You Might Want to Hold On to Your 401(k) Funds

Leaving your 401(k) funds with your employer upon retirement has multiple advantages. Keeping your money in your 401(k) plan can be the best option if it offers affordable investing possibilities.

Keep your money in a 401(k) plan even if you’re having money problems.

Think About Moving Your Money to an IRA

If you have more than one IRA or 401(k) account, it might be confusing to keep track of all your retirement savings. A simplified financial life may be yours when you combine all of your retirement resources into one Individual Retirement Account (IRA). You can also roll your funds over into the retirement plan of your new company if you intend to work after retirement.

You can look around for low-cost IRA accounts, and the investing options are more extensive than with 401(k) plans. You can choose an affordable IRA with the investments you like and there are no penalties or taxes to pay when you transfer funds directly from your 401(k) to an IRA.

Should I use a Financial Advisor?

When deciding how to transfer your 401(k) funds to an IRA, it’s a good idea to consult with a financial expert for a number of reasons. The following are a few such advantages:

Knowledge and Assistance: Financial advisors are well-versed in the ins and outs of the rollover procedure and can help you navigate it. Based on your unique financial objectives and circumstances, they may outline all of your available options, clarify any tax consequences, and provide you tailored advice.

Secondly, discuss your risk tolerance, time horizon, and retirement objectives with a financial advisor. They can then help you establish an IRA investment strategy and asset allocation that will meet your needs. Based on your needs, they can optimize your portfolio for growth or income by helping you choose investments that match with your objectives.

Optimizing Tax Efficiency: If you’re thinking of converting your 401(k) to a Roth IRA or have a combination of pre-tax and after-tax contributions in your 401(k), there may be tax ramifications when you roll over your 401(k) to an IRA. You can reduce the rollover’s tax impact with the help of a financial counselor who can guide you through these mazes.

 Simplify and Consolidate: If you have various retirement accounts from different workplaces, it can be beneficial to combine them into one IRA. This will help you organize your finances and handle your investments more easily. If you’re not sure if consolidation is the right choice for you, a financial counselor can walk you through the steps.

 Comprehensive Financial Planning: A financial advisor can assist you in reaching your long-term financial objectives through comprehensive financial planning, which goes beyond the rollover itself. Budgeting, saving for retirement or other objectives (such a down payment on a house or college), and estate planning are all examples of what may fall under this category.

Rebalancing and Monitoring: After you’ve put money into an IRA, you should check in on it every so often and make any necessary adjustments to your investing strategy. You can keep your asset allocation how you’d want it and make any required adjustments over time with the help of a financial advisor who can help you track your portfolio’s performance.

All things considered, a financial advisor may be a great asset in assisting you with the rollover and beyond, ensuring that you make well-informed decisions and that your retirement savings plan is optimized so that you can live the life you deserve in retirement.


Please see disclosures here.


The Wealth of Advice is a financial blog that is focused on retirement and wealth information, with a little of everything else sprinkled in.

I manage portfolios for clients and myself at Old North State Wealth Management.

Disclosures can be found here.

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