Retirement is a rite of passage for many people. It marks when we ride off into the sunset and live out our golden years without a care in the world. However, you may still have some concerns if you are nearing retirement. For example, what should you do with your old 401(k)?
It isn’t the most straightforward question because you have several options, and the best one depends on the situation. We’ll explore some of those options and when to consider each.
Take periodic 401(k) distributions
One of the most common ways to handle a 401(k) in retirement is by taking periodic distributions. Generally, you must be at least 59 ½ to withdraw money from your 401(k) without early withdrawal penalties. However, you typically must pay taxes on 401(k) withdrawals unless it’s a Roth 401(k).
The amount you should withdraw from your 401(k) depends on several factors. First, the average Social Security payment is $1,976 as of January 2025. If that isn’t enough to cover your expenses, you may need additional monthly income, depending on your lifestyle.
Take a lump sum distribution
Another option is to take a lump sum from your 401(k). With this approach, you withdraw all the money in the account simultaneously, meaning it will have a zero balance. This may not be necessary if you only need to pay your living expenses, but it could make sense in some situations.
For example, you might go this route if you need a lot of money at once for a big purchase, especially if you have a 401(k) that already has a low balance. For example, suppose you have $30,000 in a 401(k) and need $25,000 for a down payment on a house. You could withdraw the entire amount, using $25,000 for the down payment and depositing the remaining $5,000 into your bank account.
However, remember that withdrawing money from a 401(k) may be taxable. In addition, you could incur a 10% penalty if you aren’t 59 ½ yet.
Transfer money to an IRA
You may find that your 401(k) investments may have high fees, or perhaps it doesn’t offer the investments you prefer. Another possibility is that you have several 401(k)s you want to consolidate; a rollover IRA is a convenient way to manage your investments in one place. After rolling it into a new account, you can select your own investments, often with lower fees than a workplace 401(k) plan offers.
Leave money in the 401(k)
When you retire, one possibility is to leave the money in your 401(k), at least temporarily. Maybe your Social Security payment provides enough income, or maybe your spouse also has income, allowing you to cover your basic needs. Leaving the money in your account can allow it to continue to grow. However, if your 401(k) charges you fees year after year, it may be better to withdraw the money or roll it into an IRA.
Consider the rule of 55
When deciding what to do with your 401(k), remembering the rule of 55 is essential. Usually, you cannot take distributions from a traditional 401(k) before age 59 ½ without incurring a penalty. However, the rule of 55 states that if you leave your job or are laid off the year you turn 55 or older, you can begin taking penalty-free withdrawals. While you can avoid penalties in this situation, your withdrawals are still subject to income tax.
