What Should I Do With My 401(k) Once I Retire?

Managing your 401(k) in retirement every bit as important as managing it up to that point.

There are plenty of reasons for this but the big one is, you’re going to need this money for a long time. With good health and good luck, you could spend almost as much time in retirement as you did at work.

So, in a very real way, allocating and growing this wealth will become your new job. But taxes, required minimum distributions and other obstacles can get in the way. Familiarizing yourself with the rules can help you sustain your 401(k) as long as possible.

Talk to a financial advisor today for personal advice for your retirement accounts.

Leaving Your Employer Lets You Restructure Your Account

Perhaps the most immediate issue is that retirement triggers what the IRS calls a “separation.” This simply means that you have left your employer for some reason, whether it’s retirement, layoffs, resignation or anything else.

A separation allows you to change how and where you keep your money, and you have several options for how to do this. You could simply cash out your 401(k) and move it to a standard portfolio, but this is a bad idea that would trigger heavy taxes. Instead, three common options are:

Keep Your 401(k)

Most employers allow separated workers to keep their 401(k) so long as it maintains a minimum balance, typically $5,000 (or $7,000 beginning in 2024). If you like the structure of your plan, and if this is an option, you can leave your money in the 401(k) unchanged.

You cannot make new contributions to this plan once you retire – only withdrawals. You will also continue to pay 401(k) plan fees to the account administrator, which are more noticeable when not offset by new contributions. Finally, once your balance dips below the minimum, you can either take the remainder in a lump sum or roll it over to an IRA.

IRA Rollover

If you would like to manage your own investments, or if you would like to continue making contributions to your plan, you can take your money out of the 401(k) and put it into an IRA and/or a Roth IRA. Any money that you put into a Roth IRA will be taxed at the time of the conversion, so expect a large bill up front, but then significant advantages later.

Unlike a 401(k), you can make contributions to an IRA in retirement, but only with earned, taxable income. That means you can’t take portfolio gains and reinvest them in an IRA.

A financial advisor can help you set up an optimal retirement strategy.

Annuity Conversion

It’s also common to convert your retirement portfolio into an annuity. Buying a lifetime annuity at the start of your retirement is a good way to secure guaranteed, predictable income.

The catch is that annuities are guaranteed. Your income won’t decrease, but neither will it increase to offset inflation. Ideally, this is a good option if the annuity will generate enough money to reinvest some of it, letting you build up a growth-oriented portfolio for the future.

Plan For RMDs and Taxes

Your required minimum distributions will begin at age 73. For most people this is not a factor, as they will already have begun taking income from their portfolio. However if you have other portfolios, a job, generous Social Security or some other form of income, make sure to prepare for those drawdowns.

Prepare, also, for taxes.

The downside to a 401(k) is that you must pay taxes on your withdrawals. The IRS taxes you on your portfolio’s gains when you convert its assets into cash, and you pay those taxes at the ordinary income rates, rather than capital gains rates. This will decrease your effective income, and the size of your withdrawals will affect your Social Security benefit taxes, so budget appropriately.

Tax strategies are an important part of retirement planning. Talk to a financial advisor to build a plan today.

Allocate Your Money for Security and Growth

In most cases you will still need to plan for long-term investments. If you roll your portfolio into an IRA, you will need to manage your entire retirement personally. With an annuity, you will need a plan for growth, and even if you keep your 401(k) you may choose to reinvest excess withdrawals into a private portfolio.

In all cases, it’s important to remember that retirement is only the next phase of your portfolio, not its finish line. You need to plan for more security than before, because you no longer have income and time to replace portfolio losses. You also need to plan for some growth, though, because this money will ideally need to last 30 years or more. While living to 95 and beyond may feel unlikely, you don’t want to beat the odds only to run out of money in your later years.

Work with a financial advisor to find the right balance between those poles. You want a portfolio that will keep your money safe, but which will also keep some momentum for a comfortable future.

Bottom Line

Once you retire, you have several options for how to manage your 401(k), ranging from taking personal charge of your money to leaving it right where it is. Whatever you decide, make sure to think this through carefully, as money management in retirement is just as critical as building that nest egg in the first place.