Originally published November 2015. Last updated March 2026.
You’ve retired. Your 401(k) has been quietly growing for years. Now what? You have several options, and the right choice depends on your age, tax situation, and income needs.
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Your Options
1. Leave it in the old employer’s plan
If you like your plan’s investment options and fees, you can leave the money where it is. You can take distributions as needed. Some plans require you to withdraw the full balance once you reach a certain age or leave. Check your plan’s rules.
2. Roll it into a traditional IRA
This is the most common choice. An IRA gives you more investment options (individual stocks, bonds, ETFs, any mutual fund) and usually lower fees. The rollover is tax-free if done correctly (direct transfer, not a check to you).
3. Roll it into a Roth IRA (conversion)
You’ll pay income tax on the full amount, but future growth and withdrawals are tax-free. This can make sense if you’re in a low-tax year (the year you retire, before Social Security and RMDs kick in).
4. Take distributions
You can take regular distributions, a lump sum, or set up a systematic withdrawal plan. All distributions from a traditional 401(k) are taxed as ordinary income.
5. Leave it to your heirs
If you don’t need the money, your 401(k) can pass to your beneficiaries. But note: non-spouse beneficiaries must withdraw the entire balance within 10 years under the SECURE Act. A Roth conversion before death means your heirs inherit tax-free.
The Age 55 Rule
If you retire (or leave your job) in the year you turn 55 or later, you can take penalty-free withdrawals from that employer’s 401(k). This is a significant advantage over an IRA, where penalty-free withdrawals generally require age 59 and a half.
If you retire at 56 and might need the money before 59 and a half, don’t rush to roll the 401(k) into an IRA. You’d lose the age 55 exception.
Required Minimum Distributions
RMDs from your 401(k) start at:
- Age 73 if born 1951-1959
- Age 75 if born 1960 or later
If you’re still working for the employer sponsoring the plan (and own less than 5% of the company), you can delay RMDs from that plan until the year you actually retire.
The penalty for missing an RMD was reduced from 50% to 25% under SECURE 2.0 (10% if corrected within two years).
Tax Considerations
- Traditional 401(k) withdrawals are taxed as ordinary income. Large withdrawals can push you into higher brackets and trigger Medicare surcharges (IRMAA).
- Roth 401(k) withdrawals are tax-free (qualified). As of 2024, Roth 401(k)s no longer have RMDs.
- Consider partial Roth conversions in the years between retirement and RMD age. Your income is likely lower, making conversions cheaper tax-wise.
FAQ
Should I roll my 401(k) into an IRA right away?
Not necessarily. If you’re between 55 and 59 and a half, keep it in the 401(k) for penalty-free access. If you’re over 59 and a half, an IRA usually offers more flexibility and lower costs. If your 401(k) has excellent institutional-class funds, it might be worth keeping.
Can I contribute to a 401(k) after retirement?
No, not to your former employer’s plan. But if you have self-employment income (consulting, freelancing), you can open a solo 401(k) and contribute to that.
What about Net Unrealized Appreciation (NUA)?
If your 401(k) holds company stock, the NUA strategy lets you pay ordinary income tax only on the cost basis, while the appreciation is taxed at long-term capital gains rates when sold. This can save significant money compared to rolling the stock into an IRA. Ask your financial advisor about this before rolling over.
Schedule a free 20-minute consultation to plan your 401(k) transition in retirement.
R.L. Brown Wealth Management
106 W Vine St, Suite 300, Lexington, KY 40507
859.317.5889
