What to Do With Your 401(k) When You Retire: Tax-smart options beyond leaving it at your employer

Don’t let confusion cost you thousands: tax-smart choices for your 401(k) when you retire

Retirement day brings relief—but also choices that affect taxes, fees, and the longevity of your nest egg. Leaving a 401(k) with your former employer is easy, but it can be expensive or limiting. In 2026, with changing RMD rules, new in-plan guaranteed-income products, and growing fintech rollover tools, a one-size-fits-all answer no longer works. This guide walks through the tax consequences, fee trade-offs, and withdrawal strategies for leaving a 401(k> with your employer versus rolling it to an IRA or to a new employer plan — and gives clear decision flowcharts for retirees and soon-to-be retirees.

Top-line recommendation (inverted pyramid): what matters most

Priority #1: Minimize taxes and avoid avoidable penalties (RMDs, withholding on rollovers, IRA conversion taxes). Priority #2: Reduce investment and administrative fees. Priority #3: Preserve flexibility: investment choices, creditor protection, and access to in-plan guarantees. If you want the shortest path: get a fee comparison, confirm rollover mechanics (trustee-to-trustee transfers), and plan Roth conversions around low-income years.

2026 regulatory and market context — what changed and why it matters

• RMD age and penalties: As of 2026 most retirees face RMDs starting at age 73 due to SECURE Act 2.0 (2022). The law reduced the missed-RMD penalty from 50% to 25% and offers a further reduction to 10% if corrected within a set window — reducing some urgency but not the need to comply.
• In-plan guaranteed income: More employers now offer annuity or guaranteed-income options inside 401(k) plans. For some retirees, in-plan annuities provide a compelling longevity hedge without rollover complexity.
• Auto-rollover fintech: Robo-advisors and fintech platforms (2024–2026) increasingly offer automatic rollovers and managed payout products with tax-smart withdrawal features.
• IRS scrutiny and best practice: Trustee-to-trustee rollovers remain the safest way to avoid mandatory withholding and potential taxable events. Paper-check rollovers increase risk of withholding and errors.

Option 1 — Leave your 401(k) at your employer: benefits and costs

When it makes sense

• Your employer plan has exceptionally low fees and great investment choices (institutional share classes, broad ETF/index options).
• You want access to in-plan annuities or guaranteed-income features not available elsewhere.
• You plan to work past RMD age or want to avoid rolling and immediate decisions.
• Loan availability is important (though loans at retirement are rare and have drawbacks).

Risks and tax implications

• Fees: Employer plans vary widely. High revenue-sharing and recordkeeping fees can erode returns — sometimes 0.5%–1.0% annually or more.
• Limited investment menu: You may be stuck with higher-cost target-date funds or few passive options.
• RMDs: RMDs still apply to traditional 401(k) accounts starting at age 73 (unless you’re still employed and the plan allows), and plan administrators will withhold taxes unless you elect otherwise.
• Creditor protection: Employer plans generally get stronger federal protection from creditors under ERISA than IRAs do — a potential plus.

Option 2 — Roll your 401(k) to a rollover IRA

Benefits

• Control and choice: Broader investment options, lower-cost index funds, and the ability to consolidate multiple retirement accounts.
• Fee savings: Many IRAs at low-cost custodians have lower expense ratios and no plan administrative fees.
• Roth conversion flexibility: Easier to do partial Roth conversions across years to manage tax brackets.

Drawbacks and tax consequences

• Loss of some ERISA protections: IRAs have different federal and state creditor protections.
• RMD considerations: RMDs apply to traditional IRAs in the same way as traditional 401(k)s. Roth IRAs, however, are not subject to RMDs during the original owner’s lifetime — a meaningful tax-planning benefit.
• Conversion taxes: Rolling a traditional 401(k) into a Roth IRA triggers taxable income unless you roll into a traditional IRA first and convert later with a deliberate tax plan.

Option 3 — Roll to a new employer’s 401(k)

Many people consolidate into a new employer plan. That’s often tax-neutral and keeps funds in an ERISA plan, preserving creditor protection and access to in-plan annuities.

Considerations

• Check whether the new plan accepts rollovers.
• Compare fees and investment options — if the new plan is worse, a rollover IRA may be better.
• Rolling to a Roth 401(k) requires taxation if your old account is traditional.

Tax-smart withdrawal strategies (practical steps)

1. Map all accounts: List balances of taxable, tax-deferred (traditional 401/IRA), and tax-free (Roth) accounts.
2. Project RMDs and ordinary income: Use conservative growth assumptions to estimate RMDs at 73 and their tax impact.
3. Plan Roth conversions strategically: Convert in low-income years (early retirement before Social Security and RMDs begin). Convert only enough to stay within a lower tax bracket.
4. Manage Medicare IRMAA: Keep taxable income below thresholds that trigger higher Part B/D premiums in high-cost years.
5. Sequence withdrawals: Typically withdraw from taxable accounts first, tax-deferred next (with Roth conversions), and Roth accounts last — but tailor to your tax brackets and legacy goals.

Example: two-year Roth conversion play

Case: Maria, age 64, retiring in 2026 with $600,000 in a traditional 401(k), little other taxable income. Social Security starts at 67.

• Year 1 (age 65): Convert $50,000 to Roth IRA — taxed at a low marginal rate because no SS or RMDs yet.
• Year 2: Repeat conversion of $50,000, staying within 12%–22% bracket depending on total.
• Result: Over time Maria reduces future RMDs and secures tax-free Roth growth for longevity protection.

Fees: where they hide and how to compare

Don’t focus on headline fees alone — ask about revenue sharing, administrative fees, and fund expense ratios. Sources to check:

• Plan fee disclosures and participant notices (required annually).
• Form 5500 (Schedule C shows service-provider fees for the plan).
• Fund prospectuses for expense ratios and share-class differences.

Compare total cost as an all-in percentage. Example: a 0.75% annual fee on a $500,000 balance costs $3,750 per year — compounding over a decade can cost tens of thousands.

Practical rollover mechanics and tax traps to avoid

• Use trustee-to-trustee transfers: Direct rollovers avoid mandatory 20% withholding that applies to indirect rollovers. For safe execution see guidance on trustee-to-trustee transfers.
• Beware of partial cash-outs: Taking a partial distribution and rolling the rest can trigger withholding and tax complications.
• Rollover timing: Do not let checks sit; 60-day rollover rules are risky and have higher IRS scrutiny.
• Conversions: A conversion from a traditional plan to a Roth creates taxable income in the conversion year — plan around low-income years.

Decision flowchart — Retiree (already separated from service)

  Start
    |
    v
  Do you want the plan’s investments & low fees? --Yes--> Keep 401(k) with employer
                    |No
                    v
          Do you need stronger creditor protection or in-plan annuity? --Yes--> Keep or roll to new 401(k) if offered
                    |No
                    v
         Prefer low-cost investments + Roth conversion flexibility? --Yes--> Roll to Rollover IRA
                    |No
                    v
              Unsure: Consult advisor; consider partial rollover and compare fees
  

Decision flowchart — Soon-to-be retiree (planning ahead)

  Are you retiring in next 1-3 years?
    |
    v
  Yes --> Estimate retirement income by year (SS, pension, withdrawals, RMDs)
    |
    v
  Do plan fees or limited menu make a meaningful dent? (Compare % cost)
    |Yes--> Plan a trustee-to-trustee rollover to IRA after exit or to new employer plan
    |No--> Consider leaving if in-plan annuity or protections matter
  No (retiring later) --> Use upcoming years to test partial Roth conversions in low-income windows
  

Case studies: real-world decisions (2026 examples)

Case 1: High-fee plan — roll to IRA

John (68) had $450k in a 401(k) with a 0.9% all-in fee and few passive options. RMDs start at 73. He rolled to a rollover IRA at a low-cost custodian, saving ~0.6% annually in fees. He also staged Roth conversions over three low-income years, reducing future RMDs and expected retirement tax bills.

Case 2: Employer annuity available — keep in plan

Sandra (72) wanted guaranteed lifetime income. Her employer plan offered an institutional annuity at competitive pricing. She left $200k in-plan to purchase an in-plan guaranteed income feature and moved the rest to an IRA for flexibility.

Checklist: How to decide and execute (actionable next steps)

1. Get current plan fee disclosures and Form 5500.
2. List total balances across accounts and estimate RMDs at 73.
3. Ask your plan admin whether they allow in-plan annuities and roll-ins to the new employer plan.
4. Obtain a written fee comparison (401(k) vs IRA custodian) — include expense ratios, admin fees, and transaction costs.
5. Plan Roth conversions around low-income years; run tax-bracket projections for the next 5–10 years.
6. If rolling, request a trustee-to-trustee transfer; avoid indirect rollovers to dodge 20% withholding.
7. Document everything and update beneficiary designations post-rollover.

Tip: Small differences in fees compound. A 0.3% fee difference on a $500k balance can mean ~$150k extra over 30 years (before taxes).

Future predictions and strategy through 2030

• More in-plan income solutions: Expect more employers to offer managed payout funds and annuity windows — making staying in-plan more attractive for certain retirees.
• Automation grows: Fintech and robo-advisors will increasingly offer tax-smart multi-account withdrawal sequencing and automated Roth conversion planning.
• Policy risk: Tax rates and retirement-policy changes remain possible; maintain flexibility by diversifying tax treatment across accounts (taxable, tax-deferred, Roth).

Final verdict: no single answer — but a process works every time

Your best choice depends on fees, investment options, in-plan guarantees, creditor concerns, and your tax plan for retirement income. Use a simple decision process: compare all-in fees and investment menus, project RMDs and taxes, plan Roth conversions in low-income years, and execute rollovers as trustee-to-trustee transfers to avoid withholding.

Call to action

Ready to translate this into a personalized plan? Use our free checklist and tax-projection templates to model RMDs, Roth conversions, and fee impacts — or schedule a call with a retirement tax specialist. Making the right move at rollover time can save you tens of thousands over retirement. Act now: inventory your accounts, get your plan’s fee disclosures, and run a tax-smart rollover simulation today.

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