I’m 62. What Should I Do With My 401(k)?

At age 62, individuals often consider their options for managing accumulated 401(k) retirement savings. This stage of life allows access to these funds, typically free from early withdrawal penalties. Making informed decisions about a 401(k) at this time is crucial for retirement planning, as choices can affect tax liabilities, investment growth, and overall financial flexibility.

Understanding Your 401(k) at Age 62

At age 62, you are past the 59½ threshold for penalty-free withdrawals from retirement accounts. This means you can typically access your 401(k) funds without incurring the 10% early withdrawal penalty. While federal penalties are avoided, individual 401(k) plan rules may still influence immediate access or distribution options.

Your current employment status also affects how you can access your 401(k). If you are no longer employed by the sponsoring company, you generally have more flexibility to move or withdraw funds. If you are still employed, your plan might have “in-service withdrawal” rules, dictating when you can take money out while still working. Some plans may allow in-service withdrawals after age 59½.

The “Rule of 55” allows penalty-free withdrawals for those who leave their job in or after the year they turn 55, specifically from the 401(k) of the employer they just left. While useful for earlier access, at age 62, this rule is less relevant as the 59½ rule already applies. Regardless of employment status, review your specific 401(k) plan documents. These outline unique provisions, investment options, and associated fees.

Exploring Your Distribution Options

At age 62, several pathways become available for managing your 401(k) funds. One option is to leave your funds in the current 401(k) plan. Your money remains within the employer-sponsored plan, potentially benefiting from its investment options and administrative structure.

Another common choice involves rolling over your 401(k) to an Individual Retirement Account (IRA). This transfers funds from your 401(k) to a Traditional or Roth IRA. A direct rollover, where funds move directly from the 401(k) administrator to the IRA custodian, is recommended to avoid tax withholding and potential penalties. An indirect rollover, where you receive funds first and then deposit them into an IRA within 60 days, is also possible but carries risks if the timeframe is missed.

If you are still working or have started a new job, you might roll over your funds to a new employer’s 401(k) plan. This consolidates your retirement savings into a single account, simplifying management. This choice depends on whether your new employer’s plan accepts rollovers from previous plans.

Taking a lump-sum distribution involves withdrawing your entire 401(k) balance at once, providing immediate access to all funds. Alternatively, you can take periodic withdrawals or installments directly from your 401(k), receiving regular payments over a chosen period.

A portion or all of your 401(k) balance can be used to purchase an annuity. An annuity is an insurance contract designed to provide a guaranteed income stream, typically for a set period or for life. This converts a lump sum into predictable payments.

Key Considerations for Your Decision

When deciding what to do with your 401(k) at age 62, consider the implications of each option. Tax consequences are a primary consideration. Withdrawals from a traditional 401(k) are generally taxed as ordinary income, as contributions and earnings were tax-deferred. If you convert funds to a Roth IRA, the conversion amount is taxable in the year of conversion, but qualified withdrawals from the Roth IRA in retirement are typically tax-free.

Required Minimum Distributions (RMDs) are another factor. These are mandatory annual withdrawals from most retirement accounts that typically begin at age 73. The SECURE Act 2.0 raised the RMD age from 72 to 73 for those turning 73 in 2023 or later. Failing to take RMDs can result in a 25% excise tax on the amount not withdrawn. While traditional 401(k)s and IRAs are subject to RMDs, Roth IRAs do not have RMDs for the original owner.

Investment control and fees also vary among options. IRAs often provide a broader range of investment choices compared to employer-sponsored 401(k)s, which may have a limited selection of funds. Fees, including administrative and investment management fees, can differ significantly between 401(k) plans and various IRA providers.

Access to funds and liquidity should also be evaluated. A lump-sum distribution provides immediate full access, while periodic withdrawals offer ongoing income. Rollovers to IRAs generally provide flexibility in managing distributions.

Beneficiary planning is also affected by your choice. The SECURE Act introduced a 10-year rule for most non-spouse beneficiaries, requiring the entire inherited account to be distributed within 10 years of the original owner’s death. Spousal beneficiaries generally have more flexible options.

Creditor protection can differ. 401(k) plans generally offer strong federal creditor protection under the Employee Retirement Income Security Act (ERISA). The level of creditor protection for IRAs can vary based on state laws.

Executing Your Chosen Path

Once you have decided on a path for your 401(k), contact your 401(k) plan administrator. This is the company managing your retirement account.

After contacting the administrator, request the specific forms and instructions for your chosen distribution or rollover. These forms are necessary for processing your request.

Complete all required forms, ensuring accuracy of personal details, account numbers, and your elected distribution method. If performing a rollover, particularly to an IRA, emphasize a direct rollover to avoid mandatory tax withholding. This ensures funds are transferred directly between institutions, bypassing temporary receipt by you.

Submit the completed forms according to the administrator’s instructions. This may involve mailing physical documents, submitting through an online portal, or faxing. Following submission, follow up to verify your transaction is processing correctly.

Confirm the completion of the transaction, such as funds arriving in a new account for a rollover, or the commencement of periodic distributions. For any distributions, expect to receive IRS Form 1099-R. This form reports distributions from retirement plans and is necessary for accurate tax reporting.