401(k) Options in Retirement: How to Make the Best Decision for You

When most people think about retirement, their 401(k) is often the first account that comes to mind. For many, it’s the single largest piece of their retirement nest egg and the result of years, even decades, of saving and investing while working.

But here’s the big question: What do you actually do with your 401(k) once you retire?

Unfortunately, there isn’t a one-size-fits-all answer. The right choice depends on your goals, your tax situation, and your vision for retirement. But in this article, we’ll walk you through the main options you have, the key considerations to keep in mind, and one often-overlooked strategy that could potentially save you a significant amount in taxes.

The Three Main 401(k) Retirement Options

When you retire, you generally have three choices with your 401(k):

1. Leave it where it is.

2. Cash it out.

3. Roll it over into an IRA.

Each comes with pros and cons, and the right decision isn’t always obvious. Let’s start with your first option.

Option 1: Leaving Your 401(k) Where It Is

In many cases, your employer will allow you to leave your 401(k) in the plan after you retire. This might seem like the path of least resistance, and for some people, it’s not a bad choice. If your plan offers a wide selection of low-cost investment options and you don’t need immediate access to the funds, leaving it where it is could make sense.

But there are drawbacks too. Many 401(k)s come with administrative fees, recordkeeping costs, and investment expenses that aren’t always easy to spot. We’ve seen plans with fees between 2% and 2.5% annually. That may not sound like much, but over time, it can take a substantial chunk out of your nest egg. And remember, most of those costs don’t include personalized financial advice either.

So, if your plan is cost-effective and meets your needs, you might leave it alone. But if the costs are high and you want more guidance, you may want to explore other options.

Option 2: Taking a Full Cash Distribution

The second option is to cash out your 401(k). While the idea of a big lump sum can be tempting, this option is usually the most dangerous financially.

Why? Because the entire distribution is taxable as ordinary income. Depending on your tax bracket, you could easily lose 30% or more of your savings to federal taxes (and possibly more if your state takes a cut).

And, if you’re under 59½ when you withdraw, you may face an additional 10% penalty. There are some exceptions (such as the “Rule of 55,” which we’ll explain later), but generally speaking, cashing out is usually not the best move for most retirees.

Option 3: Rolling Over to an IRA

This is by far the most common choice and often the most beneficial. By rolling your 401(k) into an IRA, you can usually do so tax-free. If you have Roth 401(k) funds, you can roll them into a Roth IRA.

The advantage? More investment options, greater control, potential cost savings, and the ability to coordinate your accounts with your overall financial plan.

Key Considerations When Choosing

So, how do you decide between leaving your 401(k), cashing it out, or rolling it over? Here’s the main factors you should consider.

1. Costs

What’s the total cost of your 401(k)? Between plan administration, recordkeeping, and fund expenses, the fees can add up. Sometimes it’s worth leaving money in a plan if the investment options are low-cost. But if the fees are high and you’re not getting personal guidance, rolling into an IRA could be better.

2. Control

401(k) plans often require paperwork for every little move – withdrawals, conversions, rebalancing, you name it. That lack of flexibility can be frustrating. In an IRA, however, you generally have more direct access to your funds and broader control over investment choices.

3. Investment Options

Inside most 401(k)s, you’re limited to a menu of funds chosen by the plan sponsor. That might be fine if you like simplicity, but if you want access to individual stocks, bonds, ETFs, or professional money management, an IRA can offer far more freedom.

4. Consolidation

Many people accumulate multiple 401(k)s from different employers. Keeping track of them all can get messy. Consolidating into an IRA can simplify your retirement planning, help avoid overlap in your investments, and make income planning easier.

5. Coordination with Your Financial Plan

We often encourage clients to use a “bucket strategy” for retirement. That means setting aside some money for short-term needs (invested conservatively) and other funds for long-term growth (invested more aggressively). This is much harder to do with multiple scattered 401(k)s. Rolling into an IRA may allow for better alignment with your retirement goals.

Important Tax Considerations

Taxes are a huge piece of the 401(k) retirement puzzle. Here are a couple of things you’ll want to keep in mind.

The Rule of 55

If you separate from your employer at age 55 or later, you can take withdrawals from your 401(k) without the 10% early withdrawal penalty. But if you roll your money into an IRA, this benefit goes away.

For example, we had a client retire at 56. They needed income immediately, so we left a portion of their 401(k) in place to cover expenses until age 59½. After that, we transitioned the rest to an IRA. This saved them from unnecessary penalties and gave them flexibility later.

Company Stock and Net Unrealized Appreciation (NUA)

This is one of the most overlooked tax-saving strategies when it comes to 401(k)s and retirement. If you own employer stock in your 401(k), you may be able to use a strategy called Net Unrealized Appreciation, or NUA. Here’s how it works:

Normally, when you roll company stock into an IRA, you’ll eventually pay ordinary income taxes on all of it when you withdraw. But with NUA, you pay ordinary income tax only on the cost basis of the stock, and then a more favorable capital gains tax on the appreciation when you sell. Here’s an example.

Christopher, one of our clients, had $400,000 worth of employer stock in his 401(k). After checking with his HR department, we discovered the cost basis was only $20,000.

Christopher was in the 30% tax bracket for ordinary income and the 15% capital gains bracket. By using the NUA strategy, here’s what happened:

• He paid ordinary income tax on the $20,000 cost basis (about $7,000 in taxes).

• The remaining $380,000 in gains would be taxed at just a 15% capital gains rate instead of his ordinary income rate of 30%.

That’s a potential tax savings of nearly $100,000.

Now, an NUA strategy isn’t right for everyone. It depends on how much company stock you own, your cost basis, and your future tax situation. But if you have employer stock in your 401(k), it’s an option worth exploring before rolling over.

Bringing It All Together

Deciding what to do with your 401(k) in retirement is about more than just moving money around. It’s about understanding your options, evaluating the trade-offs, and making sure your decision fits your long-term plan.

To recap:

• Leaving your 401(k) in place can work if costs are low and you don’t need flexibility.

• Cashing out is rarely a good option due to taxes and penalties.

• Rolling over to an IRA gives you more control, better investment choices, and the ability to coordinate your overall plan.

• Tax strategies like the Rule of 55 and NUA can make a big difference, but only if you know about them before making a move.

Don’t Make This Decision Alone

If you’re nearing retirement, this is one of the most important financial decisions you’ll make. And once you choose, there’s often no going back.

Our team at The Noble Group is always willing to evaluate your 401(k) retirement options and create a strategy tailored to your goal.

Email us at education@thenoblegroup.com to schedule a complimentary review, or you can click here to reach out to us via phone or contact form.

This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.

No strategy assures success or protects against loss.

This is a hypothetical example and is not representative of any specific situation. Your results will vary.

The opinions voiced in this video are for general information only and are not intended to provide specific advice or recommendations for any individual.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59½ may result in a 10% IRS penalty tax in addition to current income tax.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

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