For many professionals, a 401(k) is one of the largest assets they own by the time they retire. Deciding what to do with it is not just paperwork. The choice can affect your taxes, your access to cash, the investments available to you, and how easily the account fits into a broader retirement income plan.
There is no single right answer. The options below each have trade-offs, and the best fit depends on your age, your plan's rules, and the rest of your financial picture.
Your main options
When you leave an employer, you generally have four choices for a 401(k) balance:
- Leave it in your former employer's plan, if the plan allows it.
- Roll it into an IRA, either traditional or Roth depending on the source of the money.
- Roll it into a new employer's plan, if you are taking another role and that plan accepts rollovers.
- Take a distribution, either as a lump sum or as periodic withdrawals.
The IRS rollover guidance outlines which account types can be rolled into which. Before choosing, it helps to review your plan's summary plan description and recent fee disclosure.
Questions to review before deciding
1. When will you need the money?
If you separate from service in or after the year you turn 55, you may be able to take withdrawals from that employer's 401(k) without the 10% early-withdrawal penalty. The IRS list of exceptions describes this rule. The same exception does not apply once the money is rolled into an IRA, so retirees under 59½ may want to consider timing before moving funds.
2. Do you hold company stock?
If your 401(k) includes employer stock that has grown significantly, a strategy involving net unrealized appreciation, or NUA, may be worth reviewing. In certain lump-sum distributions, the growth on employer stock may be taxed at long-term capital gains rates when sold rather than as ordinary income. The rules are specific, and rolling the stock into an IRA generally ends this option, so the decision should be made before any rollover.
3. How do the investments and costs compare?
Some employer plans offer low-cost institutional funds. Others have a limited menu. An IRA typically offers a wider range of investments, but costs vary by provider and by how the account is managed. FINRA's rollover guide suggests comparing fees, services, and investment choices before moving assets. Because a financial professional may be paid based on assets they manage, it is reasonable to ask how they are compensated and how a recommendation compares with leaving the money where it is.
4. How will withdrawals be taxed and coordinated?
Pre-tax 401(k) withdrawals are generally taxed as ordinary income, and required minimum distributions will eventually begin. Consolidating accounts can make it easier to coordinate withdrawals, Roth conversions, and charitable giving strategies. It can also simplify the paperwork your family may face later.
5. Does creditor protection matter?
401(k) plans governed by ERISA generally have strong federal protection from creditors. IRAs also have protections, but the level can vary by state and situation. For professionals with liability concerns, this difference may be worth discussing with an attorney.
How to move the money, if you roll it over
If you decide to roll over, a direct rollover sends the funds straight from the plan to the new account. With an indirect rollover, the plan pays you and generally must withhold 20% for federal taxes; you then have 60 days to deposit the full amount, including the withheld portion, to avoid taxes and possible penalties. A direct rollover usually avoids those complications.
If your 401(k) includes Roth contributions or after-tax dollars, ask how those amounts will be separated so each goes to the right type of account.
Next step
Your 401(k) decision is one piece of a larger retirement income plan. Reviewing it alongside Social Security timing, other savings, taxes, and estate goals can help you choose the option that fits.
For more on how we approach the transition, see our page for pre-retirees and our retirement planning approach.
Start Your Financial Journey to discuss your 401(k) options and how they fit into your Family Wealth Plan.
