What happens to my 401(k) when I retire?
For years, you’ve been contributing to your retirement savings by putting a part of each paycheck into your 401(k) plan. But what happens to your 401(k) account when you do retire? Here’s a look at how things will change—and some of the decisions you’ll eventually need to make.
You’re still in the plan—but can’t add to it
Most employers allow retirees to stay in their 401(k) plan, provided you meet any minimum balance requirement. This is good news because it safeguards the tax-deferred status of what you’ve saved and the earnings on your savings, and it gives you time to decide what to do with it.
If your balance is below the plan’s minimum requirement, your plan’s rules will determine what options are available. Usually, these include taking your balance in cash or moving it to an individual retirement account (IRA) that your plan makes available or that you choose on your own.¹
Two very important things do change, however:
1 Because you're no longer an active employee, you can't add any new money to your account.
2 You now need to stop thinking about savings in your 401(k) and think about how to take retirement income from it instead.
About your investment portfolio and choices
The funds you’re holding in your 401(k) account won’t change when you leave your employer. You’ll probably also have some flexibility to change investments, though restrictions may apply.
Occasionally, 401(k) plans will change their fund lineup. If it happens to yours, you could end up in a new but similar one that you didn’t select. As an ongoing plan participant, you’ll receive notices about these changes, and you’ll want to try to make sure that your money is in investments suitable for you. Whether changes like this happen or not, it can be easy to lose track of what you’re holding in an old 401(k) plan portfolio. So, if you choose to stay in your plan, consider committing to keeping a big-picture view of all your retirement investments, across all your accounts—with an eye toward maintaining an age-appropriate mix.
You can access your money without tax penalties
Note that the information in this and the next section applies to traditional 401(k) accounts, which are funded with pretax contributions and grow on a tax-deferred basis until you take your money out.
Although you’ll owe income taxes on any savings you withdraw from your 401(k) account, retirees and those approaching retirement can generally avoid the extra 10% federal tax penalty that younger people might pay. Here’s a review of the options available.
Penalty-free 401(k) withdrawals available after retirement
| If you’re age 55 or older: “rule of 55” withdrawals | Under IRS rules, you’re allowed to make withdrawals from your former employer’s 401(k) plan with no tax penalty if you’re at least age 55 and leave your job for any reason. You must make these withdrawals in the same year that you leave your job for retirement or any other reason. |
| If you’re age 59½ or older: regularly allowable withdrawals | After age 59½, you can withdraw money from any 401(k) plan—including those of current and past employers—without owing a tax penalty. |
| At any age: rollovers to an IRA or a new employer’s 401(k) plan | You can move your money directly into one of these accounts without paying current taxes or tax penalties. In reality, you’re simply preserving the tax-deferred status of your savings—which means you’ll pay taxes down the line. |
Source: U.S. Internal Revenue Service, 1/19/23.
Under RMD rules, you’ll need to remove your money eventually
According to the Internal Revenue Service’s required minimum distribution (RMD) rules, you’ll need to take withdrawals from your 401(k) accounts and IRAs each year, beginning at age 73.²
The size of your mandatory withdrawals is based on your total 401(k) and IRA savings, as well as your expected lifespan as calculated by the federal government. Whether you make them part of your retirement income plan, reinvest them, or use them for another purpose, you get to choose what to do with your RMDs once you’ve withdrawn them.
Your 401(k) plan recordkeeper will help you out by reminding you yearly about your RMDs and processing your withdrawals, including income-tax withholding.
You continue to pay plan fees
In all those years when you were contributing to your 401(k) plan, you may not have noticed the fees you were being charged for administering your plan and on certain investments. But once you stop putting money in, the effect of these expenses may become more obvious—especially in times of low market returns.
How can you get your head around your 401(k) fees? Here are a couple suggestions to consider:
- Review your annual fee disclosure statement, which should be available on your plan website. If you’re paying a high price for funds in certain categories, there may be cheaper alternatives available right in your plan.
- Compare your plan’s fees with what you’d pay in an IRA. Although many employers negotiate low 401(k) fees, you may feel you can do better overall in an IRA that you select. Start researching or go straight to the providers’ sites.
As with any other important buying decision, go with the combination of features and price that you feel is suitable for you.
Should you stick with your old 401(k) after retirement?
It all depends. If you believe that having some of your retirement savings in your former employer’s plan benefits your larger strategy, then it may make sense to keep it there. On the other hand, rolling your savings to an IRA or a new employer’s 401(k) could help simplify things for you—or provide you investment, service, or income planning options that better suit your preferences and goals.
As you do your planning, keep in mind that not all 401(k) plans work the same or charge the same fees. For details, see your summary plan description and annual fee disclosure statement, which are usually found on the plan website under “Plan information.”
A retirement or job change can be a busy and stressful time. Keeping your money in your old 401(k), where it can remain sheltered from taxes, can give you some time to plot the next step that might be suitable for you.
1 There are advantages and disadvantages to all rollover options. Participants are encouraged to review their options to determine if staying in a retirement plan, rolling over to an IRA, or another option is best for them. 2 With the recent passage and signing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0, RMD rules were modified effective 1/1/23. This article summarizes the law’s provisions. Official details from the IRS on RMDs are expected soon.
Important disclosures
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
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