When you retire, you have five main choices for your 401(k). You can leave it in the plan, roll it to an individual retirement account (IRA), roll it to a new employer's plan, take it as cash, or turn it into monthly annuity income. For most retirees, a direct rollover or leaving the money in the plan and taking it out slowly costs the least in tax. Your age, balance, marital status, and state all change the best answer. Where this article cites federal tax brackets, it uses the official 2027 figures the Internal Revenue Service (IRS) released on November 5, 2026.
Your 401(k) Distribution Options Explained
You don't have to make just one choice when you leave a job. Federal law and your plan give you four main paths. You can leave the money with your old employer, roll it to an IRA, roll it to a new employer's plan, or take cash. Some plans also offer installment payments or an annuity, both covered later. The right choice depends on your age, income needs, tax plan, and how much you want to manage yourself.
Keep Money in Your Former Employer's Plan
Leaving your 401(k) with your old employer is the simplest option. No law forces you to move it. Plans may force out vested balances of $7,000 or less. A balance of $1,000 to $7,000 is usually rolled into an IRA in your name. A balance under $1,000 may be cashed out. Above $7,000, the money stays invested and keeps growing tax-deferred.
Staying in the plan keeps two protections an IRA lacks. If you left in or after the year you turned 55, the Rule of 55 lets you withdraw without the early-withdrawal penalty. And an ERISA plan shields your money from creditors with no dollar limit. Check whether the plan allows partial withdrawals, because some allow only all-or-nothing.
The downsides: you can't add money, the fund menu may be narrow or costly, and you must keep track of an old account.
Roll Over to a Traditional IRA
Rolling your 401(k) into a traditional IRA gives you more investment choices and often lower fees. If you later go back to work and your new employer accepts rollovers, you can roll the IRA back into that plan. If an advisor offers to manage the money, ask about the yearly fee. A 1% fee eats a quarter of a 4% yearly withdrawal.
An IRA rollover gives up four things:
- The pro-rata rule applies to IRA balances. Pre-tax 401(k) money in an IRA can make later backdoor Roth contributions mostly taxable.
- Rolling over before 59½ gives up Rule of 55 access to that money.
- Employer stock loses its net unrealized appreciation tax break once you roll it over.
- In bankruptcy, IRAs are protected only up to an inflation-indexed cap, though money rolled in from a plan keeps unlimited protection. Outside bankruptcy, IRA protection depends on state law.
Roll Over to Your New Employer's 401(k)
If your new employer's plan accepts rollovers, moving your old 401(k) into it puts your savings in one place. It may also lower fees and let you borrow against the combined balance. Some plans allow after-tax contributions and in-plan Roth conversions, but that depends on the plan. There is one big advantage if you work past RMD age. The still-working exception (see Required Minimum Distributions) can delay RMDs from your current plan, including money you rolled in.
Not all plans accept rollovers, and the fund menu may be narrower than an IRA's. Plan rules also limit when and how much you can withdraw. If you leave that job later, you face the same decision again.
Take a Lump Sum Cash Distribution
Taking your whole balance as one check gives you all your money at once. That appeals to retirees who want to buy a home or pay off debt. No early-withdrawal penalty applies at 59½ or older. It also doesn't apply at 55 or older if you left this employer in or after the year you turned 55.
For most people, a lump sum brings a large tax bill. The whole amount counts as ordinary income in one year, so much of it can land in the top brackets (see Sarah's example below). The plan withholds 20% of the taxable amount, often far less than the real tax. You can ask for more on Form W-4R. A lump sum has one tax edge: it is the only way to use the net unrealized appreciation break on employer stock.
Company Stock in Your 401(k): Net Unrealized Appreciation
If your 401(k) holds employer shares that have grown in value, a special rule can cut your tax. You take a lump-sum distribution of the whole account in one tax year, after you leave the job or reach 59½. The shares move "in kind" to a taxable brokerage account. That year, you pay ordinary income tax only on the cost basis. The growth above basis, the net unrealized appreciation, is taxed at long-term capital gains rates when you sell.
Suppose the plan holds $200,000 of company stock it bought for $40,000. You report $40,000 as ordinary income now. The $160,000 of growth is taxed at capital gains rates later. If you roll the shares to an IRA instead, every dollar comes out as ordinary income. Ask the plan for your cost basis before you sign any rollover form.
How Taxes Apply to Your 401(k) Distributions
In tax year 2027, traditional 401(k) distributions are ordinary income in the year you receive them, taxed at 10% to 37%. For tax year 2027 (returns filed in 2028), the IRS inflation adjustments put the 22% bracket at taxable income over $104,050 up to $218,250 for joint filers and over $52,025 up to $109,125 for singles. The 2027 standard deduction is $33,200 joint and $16,600 single.
Nine states tax none of it: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Others tax withdrawals, at rates up to 13.3% in California for tax year 2026. Illinois exempts qualified retirement plan distributions regardless of age; Pennsylvania exempts employer-plan distributions received after retirement under plan terms; for tax year 2026, Georgia excludes up to $35,000 of retirement income at ages 62 to 64 and $65,000 at 65 and older. Federal law (4 U.S.C. §114) bars a state you have left from taxing a nonresident's distributions, so moving to a lower-tax state works once you truly change your home.
401(k) income stacks on top of everything else, so a withdrawal is taxed at the highest rate you reach. It also makes Social Security taxable. For 2027, up to 50% of benefits is taxable above $25,000 of combined income (single) or $32,000 (joint), and up to 85% above $34,000 or $44,000. Those thresholds are not indexed. Spreading distributions over several years keeps you in lower brackets.
The New $6,000 Senior Deduction and Your 401(k) Withdrawals
Taxpayers 65 and older get an extra senior deduction of $6,000 per person for tax years 2025 through 2028, whether or not they itemize. It phases out at 6% of modified adjusted gross income (MAGI) above $75,000 single or $150,000 joint. Those thresholds are not indexed. The deduction sits on top of the 2027 standard deduction and the 2027 additional age-65 deduction. That extra amount is $1,700 per married filer or $2,100 for an unmarried filer.
For a couple who are both 65 or older in 2027, the total is $33,200 + $3,400 + $12,000 = $48,600. With no other income, they could withdraw $48,600 from a 401(k) in 2027 and owe no federal income tax. For a single filer 65 or older, the 2027 figure is $24,700. A very large withdrawal raises MAGI and can wipe out the $6,000. A joint filer with $250,000 of MAGI loses all of it.
Large withdrawals or Roth conversions can also raise your Medicare premiums. Medicare sets Part B and Part D income surcharges using your MAGI from two years earlier. So a big withdrawal at 65 can mean higher premiums at 67. Spreading withdrawals across years keeps your income under the surcharge levels more often.
Withholding Is Not the Same as Tax Payment
The 20% the plan administrator withholds is a down payment, not your final tax. In the 2027 24% bracket, a $50,000 withdrawal triggers $12,000 in federal tax, but only $10,000 is withheld, so you owe the rest when you file. Any early-withdrawal penalty is not withheld either. You can raise withholding with Form W-4R for lump-sum payments or Form W-4P for periodic payments, or make estimated tax payments.
With an indirect rollover, where the check comes to you, withholding applies even though you plan to roll the money over. Receive a $40,000 distribution and the plan sends $32,000; you must deposit the full $40,000 within 60 days. Deposit only $32,000 and the missing $8,000 is treated as a taxable distribution.
The Rule of 55: Early Access Without Penalty
The Rule of 55 lets you withdraw from your 401(k) without the early-withdrawal penalty if you separate from that employer in or after the year you turn 55. It covers only that employer's plan; old 401(k)s and IRAs qualify only if you first roll them into your employer's plan before leaving. Qualified public safety employees can use age 50 or 25 years of service.
Leave at 55 in 2027 with a $500,000 balance and you could withdraw $20,000 a year penalty-free, though 2027 income tax still applies. Rolling the whole balance to an IRA right after leaving ends the exception, so leave what you need before 59½ in the plan.
A second route is substantially equal periodic payments under section 72(t), also requiring separation from service. You commit to a life-expectancy schedule for at least five years or until 59½, whichever is longer; stopping early triggers the penalty on every past payment, plus interest.
Required Minimum Distributions: When You Must Start Taking Money
Your RMD age depends on your birth year, as the SECURE 2.0 Act set these ages: 70½ if born before July 1, 1949; 72 if born July 1, 1949 through 1950; 73 if born 1951 through 1959; 75 if born 1960 or later, with the first age-75 RMDs in 2035. The required beginning date is April 1 of the following year, but waiting puts two RMDs in one tax year. If you still work for the plan sponsor and own no more than 5% of the company, that plan's RMDs can wait until April 1 after the year you retire.
Missing an RMD costs a 25% excise tax on the shortfall, reduced to 10% if corrected within the correction window (generally ending at the earliest of an IRS deficiency notice, an assessment, or the last day of the second tax year after the missed year). You can request a full waiver for reasonable error on Form 5329; see the IRS RMD FAQs.
Your RMD is the prior December 31 balance divided by the Uniform Lifetime Table factor; at 73 it is 26.5, so $530,000 means a $20,000 RMD. Each 401(k) RMD must come from that plan; only IRA RMDs can be combined. Since 2024, Roth 401(k)s have no lifetime RMDs.
Giving to Charity: Why QCDs Require an IRA
A qualified charitable distribution (QCD) sends money straight from your retirement account to a charity. It counts toward your RMD and never shows up in your income. The catch: QCDs are allowed only from IRAs, not 401(k)s, starting at age 70½. The 2026 limit is $111,000 per person under IRS Notice 2025-67. The 2027 limit has not been announced. If you give often and are near RMD age, you may want to roll 401(k) money into an IRA first. Then your gifts come out tax-free. Otherwise they count as taxable income plus a deduction most retirees can't use.
Inherited 401(k)s: Different Rules for Spouses and Non-Spouses
When someone leaves you a 401(k), your options depend on how you were related to the owner. Spouses have far more choices than anyone else.
Spouse Beneficiary Options
As a surviving spouse you can roll the 401(k) into your own IRA or 401(k), move it into an inherited IRA, or leave it in the plan. Treating it as your own is often best past 59½: no RMDs until your own RMD age (see Required Minimum Distributions), and you name your own beneficiaries. A newer option (effective 2024) lets you be treated as the deceased employee, delaying RMDs until the year your spouse would have reached RMD age.
Under 59½, keep the money in an inherited account. Inherited-account distributions avoid the early-withdrawal penalty at any age because inherited IRAs have special protection; roll it into your own IRA and that protection is gone.
Non-Spouse Beneficiary Rules: The 10-Year Rule
A non-spouse beneficiary of someone who died after 2019 must empty the account by December 31 of the tenth year after the year of death. If the owner died on or after the required beginning date, annual RMDs are also due in years one through nine; the IRS waived penalties for 2021 through 2024, but they are required from 2025 onward. If the owner died earlier, no annual RMDs apply, but emptying the account in year ten can push it into the top brackets.
Eligible designated beneficiaries get more time: a minor child of the owner until 21, then the 10-year clock; disabled or chronically ill beneficiaries and anyone not more than 10 years younger than the owner over their own life expectancy.
The only move allowed is a direct trustee-to-trustee transfer into an inherited IRA titled for the deceased, where most custodians offer adequate investment choices. No rollover into your own IRA and no 60-day redeposit.
Lump Sum vs. Annuity: How to Choose
Some plans offer a choice between a lump sum and an annuity, a guarantee of monthly payments for life. Many 401(k)s have no in-plan annuity, so this choice usually comes with a pension or an annuity bought with rollover money.
A lump sum gives you complete control, and whatever remains passes to your heirs. An annuity provides income you cannot outlive, removes investment decisions and market risk, and a joint-and-survivor option keeps paying your spouse after your death.
| Lump Sum Advantages | Lump Sum Disadvantages |
|---|---|
| Complete control and flexibility | Requires you to manage investments |
| Extra withdrawals possible for emergencies | Risk of outliving the money |
| Full remaining balance passes to heirs | Vulnerable to market downturns |
| Can invest according to your preferences | No guaranteed lifetime income |
| Annuity Advantages | Annuity Disadvantages |
|---|---|
| Guaranteed lifetime income you can't outlive | Monthly payment is fixed and lower |
| Spouse protection with joint survivor options | Limited flexibility to access extra funds |
| Eliminates investment risk and decisions | Payments stop at death unless joint-and-survivor or period-certain is chosen |
| Predictable reliable monthly income | Fees built into lower monthly payment |
The right choice depends on your health, family history, other income, and comfort with risk. If you are healthy and have little other guaranteed income, an annuity buys peace of mind. If you have other income or savings, a lump sum's flexibility may fit better. Some plans let you split the balance, for example 40% as a lump sum and 60% as an annuity.
Key Mistakes to Avoid With Your 401(k)
Knowing the biggest mistakes helps you protect your savings from penalties and permanent loss.
Choosing an Indirect Rollover Instead of a Direct Rollover
There are two ways to move a 401(k). In a direct rollover, the money goes from one trustee to the other. In an indirect rollover, the check comes to you. Indirect rollovers bring required withholding and a 60-day clock. In 2027, on a $100,000 balance, the plan sends you $80,000. You must deposit the full $100,000 within 60 days, covering the gap from your own pocket. If you deposit only $80,000, the IRS treats the rest as a distribution. You owe income tax on it, plus the early-withdrawal penalty unless an exception applies, such as leaving your job at 55 or older. The withheld amount is credited on your return, so you get it back as a refund if you complete the rollover.
A direct rollover avoids all of this: no withholding, no clock, and no deadline to miss. Always ask for a direct rollover.
Missing the 60-Day Rollover Deadline
The 60-day clock counts calendar days: a distribution received January 2 must be deposited by early March, not March 2. Missing the deadline by even one day makes the whole amount taxable, plus the early-withdrawal penalty under 59½. In 2027, on $75,000, that is income tax on $75,000 plus a $7,500 penalty.
Three ways out exist. Some waivers are automatic, such as when the institution received the money in time but failed to deposit it. You can self-certify under Revenue Procedure 2020-46 for one of 12 listed reasons, including institution error, serious illness, a death in the family, or postal error, by giving the custodian the IRS model letter and depositing within 30 days after the reason ends. Otherwise you can request a private letter ruling.
Cashing Out Your 401(k) Early
Take a single filer, age 50, no other income, who cashes out $200,000 in 2027 with no exception. Taxable income is $200,000 minus the $16,600 standard deduction, or $183,400. The 2027 federal income tax, moving up through the 24% bracket, is about $36,375. Add the early-withdrawal penalty on the full amount and the federal cost is about $56,375 before state tax, leaving roughly $143,600. These 2027 figures are illustrative.
Lost growth hurts more: left invested from 2027 at about 5% a year, the money could have roughly doubled by age 65. A 2027 hardship withdrawal is not a way around the penalty; it still applies unless a specific exception fits. Plan loans are usually unavailable after separation. At 55 or older after leaving the job, Rule of 55 withdrawals let you take only what you need.
Not Replacing the Withholding in an Indirect Rollover
Roll over $100,000 indirectly and you receive $80,000 but must deposit $100,000. Deposit only $80,000 and the IRS sees a taxable distribution of the difference. For a middle-bracket filer in 2027, that is $4,400 in federal tax, plus a $2,000 penalty if you are under 59½, for $6,400 on money that should have moved tax-free. The withheld amount is credited when you file, so the real cost is the tax and penalty on the un-rolled amount plus its lost deferral. Set aside the withheld amount from your own funds before you start.
Ignoring the Pro-Rata Rule on Roth Conversions
Suppose all your traditional IRAs hold $120,000, of which $30,000 is after-tax basis, and you want to convert just that $30,000 to a Roth. The pro-rata rule stops you: every conversion comes proportionally from all your IRAs, so 25% is after-tax, making only $7,500 of a $30,000 conversion tax-free and $22,500 taxable. The ratio uses the December 31 balance of all traditional, SEP, and SIMPLE IRAs for the conversion year, reported on Form 8606.
401(k) balances are not counted. That is why people with old pre-tax IRAs often roll them into a 401(k) first, if the plan allows, leaving only after-tax money in the IRA to convert.
Forgetting to Update Beneficiary Designations
The beneficiary form on file decides who inherits your 401(k), and it overrides your will. If you remarried and never changed the form, your ex-spouse may still be named. If your parents are listed from decades ago, your children get nothing unless you add them.
Two federal rules make this stricter than most people expect. If you are married, your spouse is the default beneficiary. Naming anyone else needs your spouse's written consent, witnessed by a notary or plan representative. Also, in ERISA plans the form wins even when state law says divorce cancels an ex-spouse's claim. The Supreme Court ruled this way in Egelhoff v. Egelhoff and Kennedy v. DuPont.
Updating takes about 15 minutes. Do it right after major life events and get written proof that the plan processed the new form.
Missing Required Minimum Distributions
Many retirees underestimate the cost of a missed RMD. The excise tax comes on top of the income tax you owe when you finally take the money. Fixing it quickly or asking for a waiver can shrink or erase that penalty (see Required Minimum Distributions).
Set a reminder six months before your first RMD, contact each plan administrator by September, and take each 401(k) RMD separately from that plan before December 31.
Rolling Over a Roth 401(k) to the Wrong Account
Roth 401(k) money can go to only two places: a Roth IRA or another plan's Roth account. It cannot be rolled into a traditional IRA. Roll Roth money to a Roth account, and roll the pre-tax part separately.
There is one trap. Your Roth 401(k) years do not count toward a Roth IRA's five-year clock. Say you open your first Roth IRA at 64 with a rollover. Its earnings are not tax-free until that Roth IRA has been open for five tax years. Opening a Roth IRA early, even with a small deposit, starts the clock. Since 2024, Roth 401(k)s have no lifetime RMDs, so you no longer need a rollover to avoid them.
Staying Invested Too Conservatively or Aggressively
Some retirees move everything into a money market fund. Even when cash yields look decent, an all-cash portfolio loses buying power over a 25- to 30-year retirement after inflation and taxes. Others stay 90% in stocks and sell in a panic when markets drop. A common guideline for a 2027 retiree is a majority in stocks (often up to 70%) with the rest in bonds and cash, plus a bucket holding the next two to three years of withdrawals so you never sell stocks in a bad year.
Real-World Scenarios: How Distribution Strategies Play Out
Seeing the rules at work in real situations makes the choices clearer. All federal figures below use 2027 brackets and standard deductions and are illustrative.
Scenario 1: Sarah Retires at 62 With $600,000 in Her 401(k)
Sarah leaves her job at 62 in 2027 with $600,000, files jointly, and has no other taxable income. Past 59½, no penalty applies.
Taking the whole $600,000 in 2027 leaves taxable income of $566,800 after the $33,200 standard deduction, and 2027 federal tax of about $133,893, with the top dollars taxed at 35%. Her state would tax most of it too; Colorado, for example, lets taxpayers 55 to 64 subtract up to $20,000 for tax year 2026 under its pension and annuity subtraction.
Instead, Sarah rolls directly to an IRA and withdraws $60,000 a year. Taxable income is $26,800 and 2027 federal tax is about $2,704 a year. At 2027 rates, that is roughly $27,000 over ten years versus $134,000 at once, with the rest still growing. Had she retired between 55 and 59½, she could have used the Rule of 55 first, then rolled over.
Illustrative, 2027 federal figures (married filing jointly, no other income):
| Strategy | 2027 Federal Tax | Outcome |
|---|---|---|
| Lump sum cash-out of $600,000 | About $133,893 in one year | Top dollars taxed at 35%; no further growth |
| IRA rollover with $60,000 a year withdrawals | About $2,704 per year (about $27,000 over 10 years) | Taxed in 10% and 12% brackets; balance keeps growing |
Scenario 2: Tom Inherits $500,000 as a Non-Spouse Beneficiary
Tom's father dies in 2026, leaving Tom, 45, a $500,000 401(k). Under the 10-year rule he must empty it by December 31, 2036. His father had not reached his required beginning date, so no annual RMDs apply; had his father started RMDs, Tom would owe one each year.
Tom transfers the money to an inherited IRA and takes $50,000 a year for ten years. At an assumed combined 2027 federal and state rate of 29%, each $50,000 costs $14,500 and nets $35,500; over ten years he pays about $145,000 and keeps $355,000. Had Tom been the surviving spouse, he could have rolled it into his own IRA, and someone born around 1981 faces no RMDs until 75.
Scenario 3: Maria and James Make an Annuity Decision at 65
Maria and James face a pension choice. Option one pays $3,000 a month for Maria's life only. Option two pays $2,400 a month for as long as either of them lives (100% joint and survivor). Maria is 65, James is 63, and both expect to live into their 90s. For a pension, joint and survivor is the default. Choosing single life needs James's written, witnessed consent. A 50% or 75% survivor option is a middle ground. The same choice comes up when you buy an annuity with 401(k) money.
Illustrative monthly pension figures under 2027 rules:
| Payout Option | Maria Gets | If Maria Dies at 80, James Gets | If Maria Dies at 90, James Gets |
|---|---|---|---|
| Single life ($3,000/month) | $3,000/month for life | $0 – payments stop | $0 – payments stop |
| Joint and survivor ($2,400/month) | $2,400/month for life | $2,400/month for life | $2,400/month for life |
Over the 15 years until Maria turns 80, single life pays $108,000 more ($600 a month for 180 months). But if Maria dies at 80, James's pension income stops. With joint and survivor, he keeps $2,400 a month for life. Couples who care most about the survivor's security choose joint and survivor.
Do's
- Do ask for direct rollovers to avoid withholding and the 60-day clock.
- Do spread withdrawals over several years to stay in lower brackets.
- Do know your RMD amount and deadline, and fix any missed RMD quickly.
- Do update beneficiary forms after major life changes, since the form decides who inherits your 401(k) no matter what your will says.
- Do use the Rule of 55 if you leave your employer at 55 or older (50 for public safety).
- Do check for company stock and the net unrealized appreciation break before you roll over.
- Do compare lump sum and annuity options if your plan offers both.
- Do check whether your 401(k) gets taxed at retirement by your state. Your former state can't tax you once you truly move.
Don'ts
- Don't cash out before 59½ unless you must. A hardship withdrawal still carries the penalty unless an exception applies.
- Don't choose an indirect rollover unless your plan requires it.
- Don't forget to replace the withholding in an indirect rollover.
- Don't miss your RMD deadline.
- Don't roll a Roth 401(k) anywhere but a Roth IRA or Roth 401(k). Its years don't count toward a new Roth IRA's five-year clock.
- Don't roll everything to an IRA before 59½ if you need early withdrawals, because the Rule of 55 after rollover no longer applies to that money.
- Don't ignore the pro-rata rule before a Roth conversion.
- Don't keep your working-years investment mix without rebalancing.
Pros and Cons Summary: Your Main Distribution Paths
Rules as of tax year 2027:
| Path | Main Advantages | Main Disadvantages |
|---|---|---|
| Leave in employer plan | Low fees possible; Rule of 55 access; unlimited ERISA creditor protection | No new contributions; old account to track; some plans allow only all-or-nothing withdrawals |
| Roll to IRA | More investment choices; often lower fees; charitable distributions at 70½ | Pro-rata rule; loses Rule of 55 access before 59½; bankruptcy protection capped |
| Roll to new employer plan | One account; plan loans; still-working RMD delay covers rolled-in money | Narrower fund menu; new plan's withdrawal rules |
| Lump sum cash distribution | Immediate access; net unrealized appreciation break for employer stock | 20% withholding; high tax in one year; penalty if under 59½ without an exception |
| Annuity (if offered) | Lifetime income; survivor options; no investment risk | Lower monthly amount; little access to extra cash; payments may stop at death |
What to do next
- Ask your plan administrator for your vested balance, the plan's payout options, and the cost basis of any employer stock.
- Decide which exceptions you need: Rule of 55 money stays in the plan, charity money goes to an IRA, and Roth money goes only to a Roth account.
- Ask for a direct rollover on the plan's form, never a check made out to you.
- Use Form W-4R or W-4P to set withholding on any cash you take, and estimate your 2027 tax with the current brackets.
- Check the beneficiary form on file and set a calendar reminder for your first RMD year.
Frequently Asked Questions
Can I withdraw my 401(k) penalty-free before age 59½?
Yes, through exceptions listed by the IRS: separation at 55 or older (50 for public safety), substantially equal periodic payments, disability, terminal illness, medical expenses above 7.5% of AGI, a $1,000-a-year emergency expense distribution, birth or adoption up to $5,000, qualified disaster up to $22,000, and QDRO payments. A hardship withdrawal by itself is not an exception.
What's the difference between a direct and indirect rollover?
A direct rollover moves money trustee-to-trustee with no withholding and no deadline. An indirect rollover sends you a check minus 20% withholding, and you have 60 days to deposit the full amount, including the withheld 20%, to avoid tax and penalty. A missed deadline can sometimes be waived by self-certification, but direct rollovers are safer.
Do I have to take my RMD in the year I retire?
Not always. If you work past RMD age and own 5% or less of the company, RMDs from your current employer's plan can wait until April 1 after the year you retire. IRAs and old plans follow the normal schedule: 73 if born 1951 through 1959, 75 if born 1960 or later.
Can my spouse inherit my 401(k) and avoid taxes?
A spouse can roll the account into their own IRA tax-free. But later withdrawals of traditional money are still taxed as income. A spouse under 59½ may prefer an inherited IRA for penalty-free access. A spouse can also choose to be treated as the deceased employee, which delays RMDs until the year you would have reached RMD age.
What happens if I miss my RMD deadline?
The IRS charges a 25% excise tax on the shortfall. It drops to 10% if you take the missed amount and file Form 5329 within the correction window. You can ask for a full waiver for reasonable error by attaching an explanation to Form 5329. Regular income tax applies when you take the money, not as a second tax.
Should I move to a different state to reduce taxes on my 401(k)?
It can pay off with large balances to withdraw. Nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) tax none of it, and federal law bars your former state from taxing a nonresident's distributions. Moving means changing domicile: home, driver's license, voter registration, days spent. Weigh property, sales, and estate taxes too.
Can I convert my traditional 401(k) to a Roth in retirement?
Yes, through an in-plan Roth conversion if your plan offers one, or a direct rollover to a Roth IRA. The converted pre-tax amount is taxable that year. The IRA pro-rata rule does not apply to a direct 401(k)-to-Roth-IRA move, since after-tax 401(k) money is tracked separately. Once RMDs start, take the year's RMD first; it cannot be converted.
What if I have a 401(k) loan when I retire?
Most plans offset the unpaid balance when you separate. You can roll that qualified plan loan offset into an IRA or new plan by depositing the same amount by your tax-return due date, including extensions, avoiding tax and penalty. Otherwise it is taxable, plus 10% if you are under 59½ and did not separate at 55 or older.
Can my adult child inherit my Roth 401(k) tax-free?
Yes, if the account has met the five-year rule, counted from your first Roth 401(k) contribution. Roth owners are treated as dying before their required beginning date. So your child owes no yearly RMDs. The money can grow tax-free until December 31 of the tenth year after your death, and then your child must empty the account.
Do I have to take Social Security at the same time as my 401(k) distributions?
No. They are separate decisions with different rules. Social Security can start as early as 62 or as late as 70, and waiting gets you bigger checks. The Social Security Administration (SSA) announced a 3.6% COLA for 2027 benefits. 401(k) withdrawals don't count toward the earnings test, but they can make more of your benefits taxable.
Related reading
- Should I Really Withdraw My 401(k) When I Quit? – Avoid This Mistake + FAQs
- Does a 401(k) Really Transfer from Job to Job? – Avoid This Mistake + FAQs
- Is a 401(k) Really Tax-Free After 60? – Avoid This Mistake + FAQs
- When Should I Really Withdraw from My 401(k)? – Avoid This Mistake + FAQs
- Should You Roll a 401(k) to an IRA or Leave It? (w/Examples) + FAQs
- Are 401(k) Plans Tax-Deferred? – Avoid This Mistake + FAQs