What Happens To My 401(k) At Retirement?

You have been saving into your 401(k) for years, and are finally approaching retirement. What will happen to your account? What choices do you have, and what should you do? You actually have a couple of options, and several pitfalls to be aware of. Some of these pitfalls could cost you big time, so be sure to stay on top of them!


1. Rollover to an IRA

After you have officially separated from your employer, you can rollover your 401(k) to an IRA. Rollover just means that the money goes from one account to another without being taxed. If you have contributed to a Roth 401(k), the money can be rolled to a Roth IRA. Employer contributions and Traditional 401(k) contributions can be rolled to a Traditional IRA.

2. Leave your 401(k) alone

Many 401(k) plans allow you to leave your 401(k) with your old employer. This is the simplest option, because you don’t have to do anything. Evaluate the investment choices and fees within your 401(k) compared to rolling it over to an IRA. Usually it makes sense to do a rollover, but leaving it alone is certainly an option.

3. Take a distribution

You can take a full distribution from your 401(k). You will have to pay ordinary income tax rates on the distribution, and could be subject to penalties if done before age 55. This is the least attractive option for most people. It is usually better to spread the taxes across many years instead of paying them all at once.


1. Rolling over before age 59 ½

Did you know that you can take distributions from your 401(k) before age 59 ½ penalty free? If you retire/quit/get fired in the year you turn 55 or later, you can take distributions from your 401(k) with paying the 10% penalty; this is known as a 72(t) distribution. Money withdrawn from an IRA before age 59 ½ will be penalized. So if you are 57 years old and plan on taking some money out of your 401(k) before 59 ½, you may not want to do a rollover until you turn 59 ½.

2. Changing your mind about distribution

You have the option to take a full distribution from your 401(k). The employer is required by law to withhold 20% of the distribution for taxes. If within 60 days you decide that you should have put the money put into an IRA, you can do so penalty and tax free. The catch? You don’t get access to the 20% withheld for taxes, which means you have to come up with money to make up for that amount. Otherwise, you will get taxed on the 20% withheld for taxes, and could even hit with a penalty! Sometimes 401(k) administrators make a mistake and send you a check instead of your IRA, so this could happen accidentally. Be sure you instruct the administrator to rollover your 401(k) by sending the check directly to the custodian holding your IRA, and not to send you any money.

When you decide which option is best for you, just be sure to stay on top of the process. There will be a lot of paperwork, but you want to be sure nothing goes awry! So what do you think? Have you ever thought about what you will do with your 401(k) once you hit retirement? Feel free to share in the comments section!

About the author

Alan Moore, CFP®, MS

Alan is passionate about providing individualized financial advice to individuals and families, regardless of their net worth, income or investable assets. An educator at his core, he strives to serve as his clients’ guide, available to help with the sometimes stressful or exciting financial situations that life inevitably brings.

Alan is the founder of Serenity Financial Consulting, which he started after noticing the lack of hourly, as-needed financial planning advice available to consumers. With experience working in several nationally recognized firms including Kahler Financial Group and Financial Service Group, Alan combines his industry experience and technical knowledge with his entrepreneurial spirit and penchant for teaching others to create a refreshing style of truly personal financial planning.

Alan is a Certified Financial Planner™ professional and Certified Retirement Counselor™. He earned his bachelor’s degrees in Family Financial Planning and Consumer Economics and his Master’s Degree in Family Financial Planning from the University of Georgia. Driven by his desire to educate, Alan also taught undergraduate financial planning courses while in graduate school.

Alan prides himself on being active in his community and feels privileged to have served in the Georgia National Guard for four years before receiving an honorable discharge. Originally from Georgia, Alan now lives in Shorewood with his wife Melissa, and enjoys taking advantage of the abundance of activities that Milwaukee has to offer.

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