How Does a 401(k) Work When You Retire? Options, What to Do
You’ll need to find out your 401(k)’s payout options, plus consider taxes, fees and investment choices, to decide what your best next steps are.
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Generally, there are three things to do with your 401(k) when you retire:
Leave your savings in your 401(k).
Roll your 401(k) into an IRA.
Withdraw the balance in a lump sum.
You’ll need to find out your 401(k)’s payout options, plus consider taxes, fees and investment choices, to decide which approach will work for you. Following these four steps can help you decide what to do.
1. Review your 401(k)’s payout policy
One key question in retirement is how you’ll create an income stream — that is, a retirement paycheck — from your savings.
If your 401(k) lets you set up regular withdrawals or an installment payment plan, then it might make sense to keep your money in the plan. A growing number of employers allow retiring workers to say, “Pay out X dollars per month,” says Steve Vernon, author of “Retirement Game-Changers” and a consulting research scholar at the Stanford Center on Longevity. But 401(k) plans vary widely. Some allow lump-sum disbursements only. Others might offer partial withdrawals, but the number is limited.
If your 401(k) doesn’t allow periodic payments, consider rolling your savings over to an individual retirement account (IRA). See this quick-start guide on 401(k) rollovers for more on this process.
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2. Take note of your 401(k) fees
While you’re taking a look at your 401(k) distribution options, jot down any fees you’re paying. They can influence your decision about what to do with your 401(k) when you retire.
Find both investment expense ratios and plan administration fees. Ask your employer for details if you can’t find the information.
Generally, a mutual-fund expense ratio that tops 1% is too expensive. Ideally, you should be paying much less — closer to 0.20% or so.
If you’re employed at a large company, there’s a good chance your 401(k) has some low-cost investment options. A 401(k) that combines low costs with robust payout options and investment choices could be a great place to keep your money, even after you retire.
Can’t find a low-cost fund in your plan? Proceed to the next step.
3. Compare your 401(k) fees and features to an IRA
When deciding what to do with your 401(k) when you retire, consider these questions:
Can an IRA offer better payout options than your 401(k)?
Can an IRA offer lower fees?
Can an IRA offer better investment choices?
If your 401(k) has limited payout options, high administrative fees or inferior investment choices, consider an IRA.
Or, if you’ve got savings spread out over a variety of 401(k) and other accounts, consider rolling those assets into your current 401(k) plan or into a new IRA.
If you decide your 401(k) isn’t the best place to keep your savings after you retire, rolling that money into an IRA (instead of taking a lump-sum disbursement) is one way to defer paying taxes on those savings.
» View NerdWallet's picks for the best IRA providers for a 401(k) rollover.
4. Assess your retirement income strategy
Consider your retirement income stream. Here are the main things to think about:
Where your monthly income will come from and how much of it will be from your savings versus Social Security.
What your expenses will be in retirement (you'll want your retirement income to exceed your expenses).
Which accounts to tap first, and how much to take. Remember that IRS rules may force you to take required minimum distributions (RMDs) from your retirement accounts.
When you will begin taking your Social Security benefits. Monthly benefits rise if you delay claiming Social Security.
Required minimum distributions are the minimum amount you have to withdraw from 401(k)s and other pretax retirement accounts, and they kick in at age 73. How much you must withdraw annually depends on your account balance and a life expectancy factor calculated by the IRS.
