What to do with your 401(k) when you retire

Finally taking that step to retire is a big one (make sure you’ve asked yourself the right questions before you do). But if that time has come, congratulations! You have worked hard to get to this point and are ready for the next chapter in your life.

Like many others, you are now facing an important decision: What should I do with my 401(k) balance?

Below we explore multiple options, along with the pros and cons of each:

1. Leave the balance within the plan

Even though you may be leaving your employer, that does not mean that you have to take your 401(k) balance with you. Most retirement plans allow you to leave your 401(k) within the company’s plan even after you retire.

Pros: Leaving your balance within your old employer’s plan will allow you to maintain ERISA protections that could be taken away if you decide to roll over the balance into an IRA and then continue contributing to that IRA.

Additionally, many 401(k) plans hire investment managers to help participants make informed financial decisions. If you were to leave the plan without working with another financial professional, these services would be lost.

Lastly, leaving your balance within the plan would keep the account invested in the market where you can lean on a long-term investment return on your money that will hopefully outpace inflation.

Cons: Although you will stay invested by leaving your 401(k) as is, if you do not roll over into an IRA, you will be limiting your investment options to those available within the plan. Similarly, you may not get the same freedom when it comes to distributions. This may differ on a plan-by-plan basis, but some plans do not allow for scheduled or partial distributions, regardless of age or termination of employment. Many people also overlook the difference in Required Minimum Distributions (RMDs) between Roth 401(k) and Roth IRA accounts. While RMDs must start in a Roth 401(k) for retired participants at age 72, Roth IRAs have no such RMD requirement. If you have a Roth balance in your 401(k), you may benefit rolling that balance to a Roth IRA when you retire.

Things to consider: Before making any decisions, compare and contrast your options. Specifically, look at the level of service you are currently provided within the plan versus the level of service you can expect if you were to exit the plan. Additionally, comparing the fees between rolling over your balance into an IRA and the expenses currently paid to stay in the plan is important.

2. Rollover the balance into an IRA

A direct rollover from a 401(k) and into an IRA is a penalty-free and tax-free transfer. Like your 401(k), an IRA still receives tax-advantaged treatment from the IRS, along with other similarities.

Pros: By leaving your old company’s 401(k) plan and rolling over your balance into an IRA, you will have more freedom and flexibility over the distributions from your account. Also, you will likely increase your overall investment options while remaining invested. If you have an outside financial professional or advisor, you also will be able to receive personalized advice on the account while potentially consolidating accounts under one money manager.

Cons: A main disadvantage of an IRA is that if you retire before age 59.5, you will not be able to access your funds without a 10% early withdrawal penalty until that age is reached. In contrast, the “Rule of 55” allows for a 401(k)-plan participant who is between the ages of 55 and 59.5 to bypass the early withdrawal penalty as long as the account stays within the 401(k) plan. Furthermore, the ERISA protection that accompanies Qualified Retirement Plans, such as a 401(k), will not transfer to an IRA. Although IRAs are not ERISA-qualified, the funds are still protected from creditors under BAPCPA if you file for bankruptcy.

Things to consider: Again, it’s important to compare the fees and costs associated with rolling your 401(k) into an IRA versus the expense to leave the account within the plan. You should also keep in mind your expected cash flow and distribution needs. As stated before, an IRA may allow for more control and flexibility, but keep in mind the “Rule of 55.” Many people also find the simplicity of consolidating accounts under one money manager or account appealing, and rolling into an IRA allows you this opportunity.

3. Cash out your balance

A third option allows you to “cash out” your account in a lump sum.

Pros: Generally, cashing out your 401(k) is not a good idea. A silver lining may be the access and liquidity of your funds, as they no longer are invested and are sitting in readily available cash.

Cons: Having your funds in cash ultimately means that you are no longer invested and will miss out on the potential of future investment return. It’s important to remember that a 401(k) account is meant to get you through retirement, and not to retirement. By staying invested throughout retirement, you can expect your account balance to last longer than it would if it were to sit in cash even as you take distributions to cover your living expenses.

If you cash out your 401(k), you will also be liable to pay all taxes associated with the transaction. To specify, all “pre-tax” money will be taxed at ordinary income rates in the year that it is cashed out. Depending on the size of your account, this could lead to a significant tax liability. On top of that, if you are under the age of 59.5, you will also be subject to the 10% early withdrawal penalty.

Things to consider: If you are thinking about cashing out your 401(k), consult with your financial and/or tax professional. Usually it makes more sense to roll over the account into an IRA or to leave the balance within your prior employer’s plan for the reasons given above. The ultimate tax liability, your age at retirement and necessary investment growth to accommodate expected cash flow in retirement are things to keep in mind.

Making a decision on what to do with your 401k when you retire?

Wipfli Financial Advisors can help walk you through your options and how they relate to your individual situation. Contact an advisor to learn more, or continue reading on:

How you can save on health insurance costs when approaching retirement
8 questions to ask yourself before you retire
How to save for retirement if you’re past your peak investing time


What to do with your 401k when you retire

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Nathan Bodart

Associate Advisor

Nathan Bodart is an Associate Advisor with Wipfli Financial Advisors, LLC, based in the Twin Cities.

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What to do with your 401(k) when you retire

time to read: 4 min