Helpful options to take into consideration for your 401(k) at retirement

When you prepare for retirement, you’ll need to decide what to do with the money in your 401(k) plan. Typically, investors roll these assets into an individual retirement account (IRA) to continue to benefit from tax-advantaged growth. This is because some workplace plans may not allow you to leave your assets in the plan indefinitely and may require you to take all of your money at once as a lump sum. Rolling over into an IRA also may provide you with more investment options to choose from and greater account flexibility.

However, many workplace plans are beginning to allow partial distributions, meaning retired investors can take out some of their money as needed and leave the remainder of their assets in their former employer’s 401(k) plan if they wish to do so. Whether that’s the right decision for you will depend on the rules of your employer’s plan, as well as your personal financial situation.

Fortunately, your decision doesn’t have to be made on the day you retire. You can take your time to determine which approach will work best for your household before you begin drawing down your retirement savings.

Employer plan considerations

As you consider your options, it’s important to understand your retirement plan’s rules about distributions. Answer these questions:

Does your 401(k) allow partial distributions?

Some 401(k) plans do not offer partial distributions and instead require you to take a lump-sum distribution (everything at once) or specific periodic payments (installments on a regular basis). In that case, an IRA rollover provides substantially more flexibility by allowing distributions, generally, to be taken at any time. If your plan allows partial distributions, you may find it more convenient to leave your assets where they are. But there are other factors worth considering before you commit.

Does your 401(k) include Roth assets?

If you have both before-tax and Roth contributions in your 401(k) plan, you’ll also need to consider its distribution rules. Many plans may have specific requirements on the order of distributions from your before-tax and Roth assets. They may also require that you take distributions from both before-tax and Roth assets on a pro-rata basis. In other words, if you have a 401(k) that includes Roth contributions, your distributions would need to include funds from both the before-tax and Roth contributions based on the ratio of each type of asset in your account.

By contrast, if you have a Roth IRA and a Traditional IRA, you can simply take distributions from each account in whatever amounts make the most sense for your current situation. For example, you may want to rely more on your Traditional IRA early in retirement, reducing the amount of required minimum distributions (RMDs) you need to take later. Keep in mind that RMDs do not apply to Roth IRAs or Roth assets in a 401(k) account. Having control over the distributions of accounts with different tax characteristics may allow for more tax efficiency over the course of your retirement.

Does your 401(k) have the best investment options for your situation?

You should also evaluate the investment options available in your employer plan and compare them with those available through an IRA. IRAs typically offer a wider array of investment options than workplace retirement plans, meaning a rollover could give you a greater choice of investments while maintaining your account’s tax-advantaged status.

On the other hand, if you are satisfied with the investment options you have, you may want to consider leaving your assets in your current plan. Large plans that have access to institutional pricing typically offer investment options at a low cost. Be sure to keep the distribution rules for your workplace plan in mind, however. Similar to the pro-rata distributions between asset types described before, some plans may not let you specify which investments you sell with each distribution.

Your personal financial situation

Consider other options that your current plan may offer as you weigh the advantages of each alternative. For example, if your plan offers annuitization options, it may be worth staying invested, particularly if a guaranteed income stream for your (and typically your spouse’s) lifetime is an important consideration. If offered by your workplace plan or IRA provider, you can use up to $210,000 (in 2025) to purchase a qualified longevity annuity contract (QLAC). This option can help you manage the risk of outliving your savings, while reducing RMDs early in retirement.

“Waiting to claim Social Security benefits is probably the most effective way to increase your guaranteed income. The longer you wait, until age 70, the higher your monthly benefits will be.”

As you consider income streams, however, don’t forget to include Social Security benefits in your calculations. Waiting to claim Social Security benefits is probably the most effective way to increase your guaranteed income. The longer you wait, until age 70, the higher your monthly benefits will be.

Keep financial flexibility and control in mind

You will need to start taking RMDs by April 1 the year after you turn 73.¹ With an IRA, you have control over which funds you liquidate to cover any distribution you take, including RMDs. Your 401(k) may not give you as much flexibility. Check with your plan’s administrator to ensure that you understand how your 401(k) handles RMD withdrawals, so you can factor that information into your decision-making.

Certain situations may merit special consideration

If you hold shares of highly appreciated company stock with an embedded capital gain (also known as net unrealized appreciation, or NUA) within your 401(k), it’s important to keep tax efficiency in mind (see “Making the most of highly appreciated company stock”). And if you have taken out a loan against your 401(k), before initiating a rollover, you should check your plan’s rules about when it must be repaid. Some plans may require you to repay the loan immediately and in full, while others may allow a systematic payback.

Also, if you need to protect your savings from creditors, take a close look at your plan’s rules. Workplace retirement plans typically offer better protection from creditors than IRAs do.

The best decision for you

Ultimately, making the right choice depends on understanding the consequences of different approaches in the context of your unique financial situation. Make sure you weigh all the advantages and disadvantages of any approach against your specific needs.

Making the most of highly appreciated company stock

Holders of company stock with net unrealized appreciation can make use of a strategy to minimize the tax impact.

If you hold a substantial amount of company stock in your workplace plan, it’s particularly important to take tax considerations into account when planning your retirement withdrawal strategy. One way to minimize the tax impact of NUA over the course of your retirement is to roll all of your retirement assets except the company stock into an IRA. If your 401(k) contains Roth assets, you would roll those into a separate Roth IRA. For actual shares of company stock (as opposed to phantom or shadow stock), you would then execute an in-kind transfer of those shares from your 401(k) plan to a taxable brokerage account. It’s important to note that all of these transactions must take place during the same tax year.

At the time of the transfer, you would owe ordinary income taxes on the cost basis of the stock. Later, when you sell any of those shares, you will pay taxes on your investment gains at the long-term capital gains tax rate, which tends to be substantially lower than the ordinary income tax rate.

If you hold highly appreciated company stock in a retirement plan, this factor could override other considerations when it comes to leaving the money in plan versus rolling it over. It can make a tremendous difference for some investors.

Situations involving company stock can be complicated. It’s generally a good idea to talk to a trusted tax professional or financial planner as you consider how to proceed.