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

One of the most common financial decisions people face in the weeks and months around retirement is one that often gets surprisingly little attention: what do you actually do with your401(k) when you leave your employer?

For most of your working life, the answer was simple — leave it where it is and keep contributing. But once you retire, that default no longer applies. You have real choices to make, and the decision you make can have meaningful implications for your taxes, your investment options, your flexibility, and your estate plan. I want to walk you through the options clearly so you can make this decision with your eyes open.

Your four basic options

When you retire, you generally have four things you can do with your 401(k):

Leave it in your former employer's plan. Roll it over to an IRA. Roll it over to a new employer's plan, if you're moving to part-time work somewhere with a retirement plan. Or take a distribution and pay the taxes.

That last option — cashing out —is almost never the right move for someone in or near retirement. You'll owe ordinary income tax on the full amount in the year you withdraw it, potentially pushing you into a much higher bracket, and if you're under 59½ you'll also owe a 10% early withdrawal penalty. I mention it only because it's an option people sometimes consider, and it's one I'd strongly encourage you to think very carefully about before pursuing.

The real decision for most retirees is between leaving the money in the plan and rolling it to an IRA. Let me walk through both.

The case for leaving your 401(k) where it is

Staying in your former employer's plan isn't always the wrong choice, and I want to be fair about that. There are situations where it makes sense.

Some 401(k) plans offer institutional-class investment options — lower-cost index funds and other vehicles — that aren't available to individual investors through an IRA. If your plan has genuinely excellent, low-cost investment options, that's a point in favor of staying.

There's also a protection angle. 401(k) plans generally have strong creditor protection under federal ERISA law— stronger in some cases than IRA protections, which vary by state. For most people this isn't a deciding factor, but for business owners or others with potential liability exposure, it's worth knowing.

Finally, if you're still working part-time and plan to delay IRA withdrawals, leaving the 401(k) in place keeps things simple in the short term.

The case for rolling to an IRA

For most people I work with, rolling the 401(k) to an IRA at retirement makes sense. Here's why.

Investment flexibility: An IRA gives you access to a much broader universe of investment options — individual stocks, bonds, ETFs, mutual funds, and more — compared to the limited menu most401(k) plans offer. That matters especially when you're building a thoughtfully constructed retirement income portfolio.

Consolidation: If you've worked for multiple employers over your career, you may have several old 401(k)s sitting in different places. Rolling them into a single IRA simplifies your financial life considerably — one account, one statement, one set of investment decisions.

Roth conversion flexibility: This is one I care about particularly. When your money is in an IRA, you have full flexibility to do Roth conversions on your own timeline, in whatever amounts make sense year by year. Some 401(k) plans allow in-plan Roth conversions, but many don't, and the process is often less flexible than managing it yourself through an IRA.

Estate planning: IRAs generally offer more flexibility around beneficiary designations and inherited account rules than 401(k) plans, which can matter significantly for clients who are thinking carefully about what they'll pass on.

The rollover process: what to watch out for

If you decide to roll your 401(k) to an IRA, the mechanics matter. The right way to do it is a direct rollover — your plan administrator transfers the funds directly to your IRA custodian, and the money never touches your hands. This is clean, simple, and has no tax consequences.

The wrong way — which catches people off guard — is an indirect rollover, where a check is made out to you personally. In that case, your employer is required to withhold 20% for taxes. You then have 60 days to deposit the full original amount (including the withheld 20%, which you'd have to cover out of pocket) into an IRA to avoid taxes and potential penalties. Miss the 60-day window and the entire distribution becomes taxable income.

Always ask for a direct rollover. It's simpler, cleaner, and eliminates the risk of an accidental taxable event.

The net unrealized appreciation exception

One situation worth flagging separately: if your 401(k) holds company stock that has appreciated significantly, there's a strategy called net unrealized appreciation — NUA —that can allow you to pay long-term capital gains rates on the appreciation rather than ordinary income rates. This can be meaningfully advantageous in the right circumstances.

It's a nuanced strategy with specific requirements, and it's not right for everyone. But if you have a significant concentration of appreciated employer stock in your 401(k), it's worth a conversation before you roll everything to an IRA, because the rollover can eliminate the NUA opportunity permanently.

Timing the rollover thoughtfully

One thing I encourage clients to think about is timing. The year you retire is often a lower-income year — you may have only a partial year of salary, and your retirement income streams may not all be flowing yet. That can make it a good year to think about partial Roth conversions alongside the rollover, deliberately filling up lower tax brackets while your income is unusually low.

The rollover itself isn't a taxable event — moving money from a 401(k) to a traditional IRA is tax-neutral. But if you want to convert some portion to Roth at the same time, doing it in a year of lower income can reduce what you owe. It's worth modeling before you make the move.

A decision worth getting right

The 401(k) rollover decision isn't one you have to make the day you retire. Most plans will let you leave the money in place for a reasonable period while you think it through. I'd encourage you to take that time and make the decision deliberately — because while rolling to an IRA is straightforward and reversible in some circumstances, other choices (like the NUA strategy) have windows that close permanently.

If you're approaching retirement and want to think through what to do with your 401(k) — or any other retirement accounts — I'd be glad to walk through the options with you.

Disclosure

The content of this post is for educational purposes only and should not be construed as personalized financial, tax, or legal advice. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. Investment advice offered through IHT Wealth Management, a registered investment adviser.