What to Do With Your 401(k) After Retirement

A 401(k) is a common retirement savings tool, but after retiring, deciding how to manage it is crucial. Your choices affect taxes, investment growth, and how long your savings last. Making informed decisions ensures your money supports you throughout retirement.

Available Distribution Methods

After retiring, you must decide how to withdraw money from your 401(k). One option is a lump sum distribution, which provides immediate access to your full balance but triggers a significant tax bill since the entire amount is taxed as ordinary income in the year of withdrawal. This can push you into a higher tax bracket.

A more measured approach is periodic withdrawals, allowing you to take money in scheduled amounts—monthly, quarterly, or annually. This method provides a steady income while keeping the remaining balance invested. Many plans allow automated withdrawals, simplifying cash flow management.

If permitted, you can leave your money in the 401(k) and withdraw funds only when needed. This keeps investments growing tax-deferred but may not be an option if your employer requires you to move the funds after retirement. Checking your plan’s rules is essential.

Rollovers to Other Accounts

Rolling your 401(k) into another account can provide tax benefits and investment flexibility. A common choice is transferring funds to an Individual Retirement Account (IRA), which maintains tax-deferred growth and typically offers more investment options than employer-sponsored plans.

A direct rollover, where funds move straight to an IRA, avoids immediate taxation and penalties. An indirect rollover, where funds are sent to you first, must be deposited into a new account within 60 days to avoid taxes and penalties. With an indirect rollover, 20% is withheld for taxes, meaning you must replace that amount from other sources to complete the full transfer.

If retiring early, rolling into another employer’s 401(k) may be beneficial. Some 401(k)s allow penalty-free withdrawals starting at age 55 if you leave your job, while IRAs generally impose a 10% penalty before age 59½. Consolidating an old 401(k) into a new employer’s plan can simplify management and may provide access to lower-fee institutional investments.

Required Minimum Distributions

At age 73, federal law mandates required minimum distributions (RMDs) from your 401(k). The IRS calculates RMDs based on your account balance at the previous year’s end and a life expectancy factor. For instance, if you turn 73 in 2025 with a $500,000 balance at the end of 2024, your first RMD would be about $19,231.

Failing to take an RMD results in penalties. Under the SECURE 2.0 Act, the penalty for missing an RMD has been reduced from 50% to 25% of the shortfall and can drop further to 10% if corrected within two years. Many retirees automate withdrawals or use RMD calculators to avoid miscalculations.

If you have multiple 401(k) accounts, each requires a separate RMD calculation and withdrawal, unlike IRAs, where RMDs can be combined and withdrawn from a single account. Consolidating accounts before RMDs begin can simplify management and reduce the risk of missed distributions.

Tax Considerations on Withdrawals

Withdrawals from a 401(k) are taxed as ordinary income. Large withdrawals in a single year can push you into a higher tax bracket. Spreading withdrawals over multiple years can help manage tax liability. Some states exempt retirement income, while others tax it partially or fully.

Coordinating withdrawals with other income sources can improve tax efficiency. For example, withdrawing from a 401(k) before claiming Social Security can keep provisional income lower, reducing taxes on benefits. If Social Security is already being received, careful planning helps avoid higher taxation.

While 401(k) withdrawals are not subject to capital gains taxes, selling investments outside tax-advantaged accounts in the same year could create additional tax liability.

Passing the Account On

Planning for your 401(k) after your passing ensures beneficiaries receive funds efficiently while minimizing taxes. How the account transfers depends on the designated beneficiary.

Spouses have the most flexibility. They can roll the account into their own IRA, delaying RMDs until their own required age, or keep the inherited 401(k) in their name and take RMDs based on their life expectancy. If the original account holder had begun RMDs, the spouse can continue those distributions or recalculate them based on their own age.

Non-spouse beneficiaries face stricter rules. Under the SECURE Act, most must withdraw the full balance within 10 years, potentially creating higher tax burdens if taken during peak earning years. Exceptions exist for minor children, disabled individuals, and those less than 10 years younger than the deceased, who may still qualify for lifetime distributions.

Naming a trust as a beneficiary can provide structured payouts and creditor protection but requires careful planning to avoid unintended tax consequences. Consulting an estate planner can help ensure the account is passed on in the most tax-efficient manner.