What to do with your 401(k) when you retire

You have three main options: leave the money in your former employer's plan, roll it to a traditional IRA, or start converting some or all of it to Roth. Each has different rules, costs, and tax consequences. The right move depends on your age, your other income sources, and what you plan to do with the money first.

You have more options than most people use

Most people leaving a job assume they should roll the 401(k) to an IRA and be done with it. Sometimes that's right. But the default answer isn't always the best one, and making the wrong move can cost you in taxes or close off strategies you'll want later.

Leaving it in the plan

Your former employer's plan must let you keep the money there as long as your balance is above $7,000. That can make sense in a few specific situations:

• You're between 55 and 59½ and might need the money — 401(k) plans allow penalty-free withdrawals after you separate from service at 55, while IRAs require you to be 59½
• The plan holds employer stock you're considering selling under net unrealized appreciation rules
• The plan offers institutional funds with very low costs you'd lose by rolling out

The downside: you're limited to that plan's investment menu and can't add money or easily consolidate accounts.

Rolling to a traditional IRA

A direct rollover to a traditional IRA is tax-free, expands your investment options, and makes it easier to manage everything in one place. It's usually the right move when you don't have a strong reason to stay in the plan.

One thing to know: rolling to an IRA costs you the age-55 exception for penalty-free withdrawals. If you're under 59½ and might need the money before then, that matters.

Converting to Roth

Rolling to a traditional IRA and then doing Roth conversions over several years is often the highest-value move for people retiring in their early 60s. The years between your last paycheck and your first required minimum distribution at 73 are typically your lowest-income years — a tax planning window most people never use.

Converting in stages — filling up the 22% or 24% bracket each year — shrinks your future RMDs, lowers your lifetime tax bill, and can leave heirs a tax-free account instead of a taxable one. But it requires careful sizing: convert too much and you push yourself into a higher bracket, raise your Medicare premiums, and increase the taxation of your Social Security.

Frequently asked questions

Should I roll my 401(k) to an IRA when I retire?

Usually yes, but not always immediately and not always to a traditional IRA. If you're between 55 and 59½ and might need the money, staying in the plan can make sense. If you're planning Roth conversions, rolling to a traditional IRA first is typically the right first step.

Can I convert my 401(k) directly to a Roth IRA?

Yes. You can roll a 401(k) directly to a Roth IRA, but you'll owe income tax on the full amount in the year you convert. Most people benefit from spreading conversions over several years to avoid a large tax spike.