What to Do With Your 401(k) When You Retire: 5 Options Compared

You’ve worked hard for decades to build your 401(k). Then comes the last day of work, a stack of paperwork, and a question that feels bigger than any other: what do I do with this money now?

It’s one of the most common questions we hear at Crestview, and the answer matters. The choice you make can affect your taxes, your investment options, your income, and what you leave behind. Here are your five options, with the pros and cons of each.

Option 1: Leave It in Your Former Employer’s Plan

Many plans let you keep your money where it is after you retire.

Pros:

• No action required, and no tax event.
• Institutional-priced funds can be low-cost.
• If you leave your job in or after the year you turn 55, you may be able to take penalty-free withdrawals from that plan before age 59½ (often called the Rule of 55).

Cons:

• Investment choices are limited to the plan’s menu.
• You’ll have to keep track of an account at a company you no longer work for.
• Some plans limit withdrawal flexibility or charge fees to former employees.

Option 2: Roll It Into an IRA

A rollover moves your 401(k) into an individual retirement account that you control. Done correctly through a direct rollover, it’s not a taxable event.

Pros:

• A much wider range of investments.
• Easier to consolidate several old accounts and see your whole picture.
• More flexibility for withdrawals, income planning, and Roth conversions.
• Often better access to personalized advice.

Cons:

• You give up the Rule of 55 for the money you roll out.
• Some 401(k) plans offer unusually low fees or special features worth comparing.
• You’ll want to compare costs and services before you move the money.

This is the route many of our clients take, and our IRA and 401(k) rollover service is designed to help you weigh it against the alternatives.

Option 3: Roll It Into Your New Employer’s Plan

If you’re not fully retiring, say you’re taking a new job or consulting position, your new plan may accept a rollover.

Pros: Consolidation, and the money may remain protected under employer plan rules. If you’re still working and don’t own 5% or more of the company, you may be able to delay RMDs on the money in your current employer’s plan.

Cons: You’re limited to that plan’s investments, and not every plan accepts rollovers.

Option 4: Cash It Out

You can take the entire balance as a lump sum, but this is rarely a good idea.

The downsides are significant:

• The entire pre-tax amount is taxed as ordinary income, which could push you into a much higher bracket.
• The plan must withhold 20% for federal taxes, and that may not be enough.
• If you’re under 59½, a 10% early-withdrawal penalty may apply (with some exceptions).

The money you cash out also stops growing tax-deferred. For most retirees, this is the option to avoid.

Option 5: Roll Over and Convert Some or All to a Roth

If you want tax-free growth and withdrawals later, you can roll your 401(k) into an IRA and convert part of it to a Roth. You’ll owe income tax on the converted amount, so timing and size matter. Retirement often creates a window of lower income before Social Security and RMDs begin, which can make conversions attractive. See our guide to Roth conversions before year-end (update link once published).

Special Situation: Company Stock in Your 401(k)

If your 401(k) holds shares of your employer’s stock, a strategy called net unrealized appreciation (NUA) may let you pay long-term capital gains rates on the stock’s growth instead of ordinary income rates. It has strict rules and isn’t right for everyone, so talk to a professional before you roll anything over.

Five Factors to Weigh Before You Decide

1. Costs. Compare plan fees and fund expenses against what you’d pay in an IRA.
2. Investment choices. Do you want more flexibility, or is the plan’s lineup enough?
3. Access to money. If you’re retiring before 59½, the Rule of 55 could matter.
4. Taxes. Think about RMDs, Roth conversions, and your bracket over the next 10 to 20 years. Read our RMD guide (update link once published).
5. Income plan. Your 401(k) is likely the engine of your retirement paycheck. How it’s invested and withdrawn should fit a retirement income strategy, not sit in isolation.

Common 401(k) Retirement Mistakes

• Taking a check made out to you. An indirect rollover gives you only 60 days to redeposit the money, and 20% will be withheld. A direct, trustee-to-trustee transfer avoids this.
• Forgetting about old accounts. Many people have several 401(k)s scattered across former employers.
• Ignoring beneficiaries. Your beneficiary designation, not your will, controls who inherits the account. Review them with your estate and legacy plan.
• Staying too aggressive, or too conservative. Retirement changes how much risk you can afford. Our investment strategies and wealth and asset management services help align your portfolio with your goals.
• Overlooking the tax picture. The best choice for your 401(k) depends on your whole financial plan, including Social Security timing and long-term care planning.

Frequently Asked Questions About Your 401(k) in Retirement

Do I have to do anything with my 401(k) when I retire? Not immediately. Many plans allow you to leave your money in place. But you should make an intentional decision rather than let it default, and remember that RMDs will apply once you reach RMD age.

Is a 401(k) rollover taxable? A direct rollover from a 401(k) to a traditional IRA is generally not taxable. Converting to a Roth IRA, or cashing out, is taxable.

What’s the difference between a direct and an indirect rollover? In a direct rollover, the money moves from one custodian to another and never touches your hands. In an indirect rollover, you receive the funds and must deposit them within 60 days, and 20% is typically withheld for taxes.

Can I roll over my 401(k) while I’m still working? Sometimes. Some plans allow in-service rollovers once you reach a certain age, often 59½. Check your plan’s rules.

Should I roll over my 401(k) to an IRA or leave it in the plan? There’s no one right answer. It depends on fees, investment options, your need for access to the money, and your overall plan. A side-by-side comparison is the best way to decide.

What happens to my 401(k) if I retire early? If you leave your employer in or after the year you turn 55, you may be able to withdraw from that plan without the 10% penalty. Rolling the money into an IRA gives up that exception, so timing matters.

Does Crestview charge for a rollover review? To learn how we work and how we’re compensated, contact us or schedule a meeting.

Not Sure What to Do With Your 401(k)?

You don’t have to figure it out alone. Our team helps retirees compare their options and build a clear path forward. Take our free retirement assessment or call (469) 338-5333. We’ll help you decide what makes sense for your situation.

Crestview Wealth Management, LLC (CWM) is a Texas-registered investment advisor. CWM is a member of Ethos Financial Partnership, a Securities and Exchange Commission registered investment advisor. Content contained herein is not intended and should not be construed as personalized investment advice or an offer for the purchase or sale of any security, insurance, or other investment product.  Investments involve the risk of loss, including possible loss of principal.  Please consult with a qualified financial, tax, accounting, or legal professional before implementing any ideas or strategies discussed here.  Content provided may be obtained from sources believed to be reliable but cannot be guaranteed as to its accuracy or completeness.