What Happens to Your 401(k) When You Retire?

Retirement can bring new choices for the money you've spent years building. Understanding your options can help you decide what comes next.

For years, your 401(k) may have been something happening quietly in the background.

Money came out of each paycheck. Your employer may have contributed. Investments had time to grow. And little by little, the account became an important part of your retirement savings.

Then retirement arrives—and suddenly there's a new question:

What happens to my 401(k) now?

The answer is that retirement doesn't automatically mean you have to empty your 401(k). Depending on your plan and circumstances, you may have several choices for what happens next.

Option 1: Leave Your Money in Your Former Employer's 401(k)

Depending on the plan and your account balance, you may be able to leave your savings right where they are after you retire.

That may appeal to someone who is comfortable with the plan's investment choices, fees and features.

But once you're no longer contributing through payroll, it's worth understanding how the account fits into your broader retirement strategy.

Questions to consider might include:

• What investment choices are available?
• What fees am I paying?
• What withdrawal options does the plan provide?
• How easy will the account be to manage during retirement?
• How does it coordinate with my other retirement accounts?

The specific rules and distribution choices available to you depend on your employer's plan documents.

Option 2: Roll the Money Into an IRA

Another possibility may be rolling eligible 401(k) assets into an Individual Retirement Account, or IRA.

A rollover can allow retirement savings to remain in a tax-advantaged retirement account rather than being taken as a current cash distribution. A traditional 401(k)-to-traditional IRA rollover generally defers taxation until money is later withdrawn. Different tax consequences can apply when pretax money is converted or rolled to a Roth IRA.

An IRA may also provide different investment choices and can sometimes make it easier to consolidate retirement accounts.

However, IRAs and employer plans can differ in important ways, including fees, investment options, services, withdrawal provisions and other features.

A rollover isn't automatically better simply because retirement has begun.

Option 3: Roll It Into Another Employer's Plan

Retirement isn't always the end of employment.

Some people retire from one company and later work somewhere else. If a new employer's retirement plan accepts incoming rollovers, eligible assets from an old 401(k) may potentially be moved into the new plan.

For someone considering this option, it can be useful to compare the features, costs and investment choices of both plans before making a decision.

Option 4: Begin Taking Money Out

Your 401(k) was built for retirement, so at some point those savings may become part of the money you use to live.

Depending on your plan, distributions may be available as a lump sum, installments or other permitted payment forms.

But taking money from a traditional 401(k) can have tax consequences. Amounts that haven't previously been taxed are generally included in taxable income when distributed unless they're properly rolled over.

That's why a withdrawal decision shouldn't necessarily begin with:

"How much can I take?"

A more useful question may be:

"How does this money need to work with the rest of my retirement income?"

Be Careful With a Check Made Payable to You

There is an important difference between a direct rollover and having an eligible rollover distribution paid directly to you.

With a direct rollover, the retirement plan sends the eligible funds directly to another eligible retirement plan or IRA. Generally, federal income tax isn't withheld from the amount transferred directly.

If an eligible rollover distribution from an employer retirement plan is instead paid directly to you, the plan generally must withhold 20% for federal income tax, even if you intend to roll the money over later. Generally, you then have 60 days to complete an eligible rollover, subject to applicable rules.

That's an important distinction to understand before moving retirement money.

Your 401(k) Is Only One Piece of Retirement Income

One of the biggest changes at retirement is the transition from accumulating money to figuring out how that money may support you.

Your retirement income could eventually come from several places:

• Social Security
• Pensions, if available
• 401(k)s and other employer retirement plans
• IRAs
• Personal savings and investments
• Annuities
• Other income sources

Those pieces don't necessarily operate independently.

Decisions about when and how to use one source of retirement money can affect the role of the others.

That's why looking at the entire retirement-income picture can be more useful than considering a 401(k) in isolation.

Could an Annuity Play a Role?

For some retirees, part of the conversation may include whether an annuity could play a role in their overall retirement-income strategy.

Certain annuities are designed to provide guaranteed income, subject to the claims-paying ability of the issuing insurance company. The features, guarantees, liquidity provisions, fees and surrender charges can vary significantly by contract.

An annuity isn't the right answer for every retirement account or every retiree.

But for someone concerned about creating predictable income from a portion of retirement savings, it may be one of the options worth understanding.

Before You Make a Decision

Before deciding what to do with an old 401(k), consider gathering some basic information first.

Ask yourself:

What are the fees and expenses in my current plan?

What investment choices are available?

What withdrawal options does the plan offer?

Do I have other retirement accounts that should be considered together?

How much income will I need in retirement?

How important are liquidity, flexibility and predictable income to me?

What are the tax consequences of the choices I'm considering?

And most importantly:

What role do I need this money to play during retirement?

There isn't one answer that's appropriate for everyone.

CDA: Worth Knowing

Retirement doesn't necessarily mean your 401(k) needs to move immediately.

It means you may have decisions to make about money you've spent years building.

Understanding the choices available—and how each could fit into your broader retirement-income strategy—can help you have a more informed conversation before making a change.

If you're approaching retirement and have questions about how your 401(k), IRA, annuity or other retirement assets may fit together, CDA of America is here to help you understand the options available to you.

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