Deciding What to Do With Your 401(K) at Retirement: Key Considerations

Wim De Gent
By Wim De Gent
January 16, 2025Personal Finance
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Deciding What to Do With Your 401(K) at Retirement: Key Considerations
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For most employees, deciding what to do with a 401(k) at retirement has traditionally been pretty straightforward: roll it over. However, this trend is starting to shift as employers and defined-contribution plan advisors are increasingly recognizing the benefits of holding on to 401(k) assets after retirement.

According to a 2021 Pimco survey of retirement plan consultants and advisors, 36 percent of firms said they actively encourage participants to stay put in their plans after retirement.

If you’re contemplating whether to leave your retirement savings in your current 401(k) or roll them over into an IRA, here are the key factors to evaluate, listed by importance:

1. The Quality of your 401(k) Plan

The primary determinant of whether to stay or move your assets would be the quality of your 401(k) plan. Evaluate the plan using the following three criteria:

  • Investment options: Check whether the plan offers diverse investment options, such as mutual funds, index funds, large- and small-cap funds, foreign funds, real estate funds, and bond funds, ranging from aggressive growth funds to conservative income funds.
  • Investment fees: Assess the expense ratios of the available funds. Lower-cost investments can have a significant impact on long-term returns.
  • Administrative fees: Be aware of additional administrative fees charged by your plan.

If your plan includes collective investment trusts (CIT) rather than publicly traded mutual funds that are open to the public, obtaining information on performance and fees might require extra research. Morningstar offers up-to-date ratings and data to assess investment options.

2. Do You Need Early Access to Your Funds?

If you’re retiring before age 59.5 and anticipate needing early access to your money, staying in the 401(k) may be the better option, even if the plan isn’t all that great. That’s because under the IRS “Rule of 55,” 401(k) investors who have left their employers can tap their assets at age 55 without penalty, a touch earlier compared to IRA investors who need to wait until 59.5 years of age.

This can be especially useful for those who retire early and don’t yet have other income sources, such as Social Security. However, to avoid premature depletion of retirement funds, make sure to evaluate your 401(k)’s long-term sustainability before making significant withdrawals at an early age.

3. Does your Plan Allow Flexible Withdrawals?

Withdrawal flexibility is another critical consideration. Some 401(k) plans do not allow retirees to select which investments they tap for withdrawals. Instead, withdrawals are taken pro rata from all the holdings in the account.

Similarly, if your 401(k) includes both traditional (pre-tax) and Roth (after-tax) contributions, your plan may require that withdrawals come proportionately from both types of accounts.

These limitations can impact your ability to adjust your portfolio efficiently after withdrawal and limit your options in terms of managing your withdrawals for tax optimization purposes.

4. Do You Need Creditor Protection?

Legal protections for retirement assets are an important but often overlooked factor. Employer-sponsored 401(k) plans generally offer stronger protections from creditors and lawsuits under federal law than IRAs, which are subject to state laws.

While IRAs provide substantial protection in case of bankruptcy under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (capped at roughly $1.5 million and adjusted every three years), 401(k) plans offer more comprehensive protection overall, especially in non-bankruptcy situations.

This aspect is particularly relevant if you have past credit issues, or if you have a profession with relatively high odds of liability claims, such as a doctor or a business owner. If safeguarding your assets from potential legal claims is a priority, keeping your money in a 401(k) is probably the better option.

5. Ease of Management

Consolidating your retirement accounts by rolling your 401(k) into an IRA may simplify your financial life, especially if you have multiple plans from former employers.

Conversely, some employers provide access to financial advisors or fiduciary services as part of their 401(k) plan. If your plan has these options and you prefer consulting professionals over flying solo, this could be a compelling reason for you to stay put past retirement age.

The Associated Press contributed to this article.