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

When workers retire, a key decision they may face concerns their 401(k) savings — do they leave the money in their employer plan, or roll it over to an individual retirement account?

Companies are increasingly adding features to their 401(k) plans that may entice retirees to leave their money there, including more flexibility for retiree withdrawals and annuity options in their lineups. These changes are intended to accommodate better the needs of retired workers, who shift from accumulating assets as an employee to spending them as a retiree.

It’s also generally in the company’s interest to keep retirees with large balances in its 401(k) plan, said Craig Copeland, director of wealth benefits research for the Employee Benefit Research Institute. The more assets in the plan, the lower the cost for both the plan’s administrator and participants.

“Keeping high-balance accounts in their plan [means] they can spread the costs among more assets,” Copeland said.

The slow but steady changes are coming as roughly 11,000 people turn age 65 every day, in what’s called “peak 65” — the biggest number of Americans hitting that age in history, according to the Alliance for Lifetime Income. An estimated 4.1 million are expected to reach that age from 2024 through 2027.

Additionally, more workers are reaching retirement with a 401(k) and need to figure out how to stretch it across their lifetime. That’s in contrast to decades ago, when it was more common to retire with a company-sponsored pension that delivered steady income throughout retirement.

Older workers — those at least age 55 — are more likely than younger workers to self-direct their retirement investments versus use professional guidance, according to Vanguard’s 2025 How America Retires study. One-half of them are do-it-yourself investors, and they tend to have higher balances, averaging $420,000. This means they may be making decisions about their 401(k) on their own.

The fear of not having enough income is prevalent among savers: 66% worry they’ll run out of money in retirement, according to Blackrock’s 2025 Read on Retirement survey. The majority — 93% — want guaranteed income in their golden years.

While ex-workers can roll over their 401(k) money to an IRA, it also means managing their own assets or paying a professional to do it. There also are a host of factors that should be considered before moving the money, including available investment options and fees, experts say. 

Of course, it may not occur to retirees that they can leave their assets in their 401(k): More than half — 53% — of 401(k) participants are unaware that they don’t have to move their money, according to a 2024 report from the Government Accountability Office. 

Most plans let you leave your assets there, including when you retire — though 2% of plans require you to move your money by age 65 or age 70, according to Vanguard. It’s a share that has remained very low over the years: In 2014, it was 4%.

The other exception: Small accounts, which are often kicked out of the 401(k) plan when an employee retires or otherwise leaves.

Many plans will close accounts with a balance under $1,000 and send a check to the ex-worker. If the money is not put into another qualified retirement account (i.e., an IRA), it is considered a distribution that may be subject to income taxes and, potentially, a 10% early withdrawal penalty.

The general rule with retirement accounts is that the penalty applies if you are under age 59½. But for 401(k)s, you can take withdrawals if you are age 55 or older in the year you leave your company.

Employers also may roll over balances of under $7,000 to an IRA.

Last year, 68% of plans let retirees establish installment payments from their accounts, and 43% of plans allowed them to take partial ad hoc cash distributions — up from 59% and 16%, respectively, in 2015, Vanguard’s research shows. If a plan doesn’t have those options, any retiree seeking to use part of their retirement savings has to withdraw the entire balance or roll it over.

However, be aware that even with installment payments or occasional withdrawals, you may face some limitations.

“Many plans are rigid when it comes to withdrawals, not only in the frequency that is allowed but in selecting what to sell to fund a withdrawal,” said certified financial planner Daniel Galli, principal with Daniel J. Galli & Associates in Norwell, Massachusetts.

For example, he said, if you’re invested in multiple funds in your 401(k) but you only want to withdraw from a particular one, you may not be able to do that.

“Many plans require withdrawals to be pro-rata from all holdings,” Galli said.

In contrast, in an IRA, “you can select which funds to sell, and this can allow you to sell investments that are doing well or better than others, potentially prolonging your portfolio,” said CFP Rose Price, a financial advisor and partner with VLP Financial Advisors in Vienna, Virginia.

Meanwhile, some 401(k) plans have started incorporating annuities in their lineup in various forms to help workers have guaranteed income in retirement. Although an annuity might include an investment component, it’s a contract: You hand over your money and the provider (typically an insurance company) promises to issue regular payments to you across many years. Sometimes, that can be decades.

The Secure Act of 2019, which made a variety of changes to the U.S. retirement system, included a provision intended to eliminate companies’ fear of legal liability if their chosen annuity provider fails or otherwise doesn’t deliver on its promises.

Today, the number of 401(k) plans that allow some sort of annuity remains low, Copeland said. 

“Some plans have started to offer these different types of income options, but we still don’t know what the real take-up of it is,” Copeland said.

Some may provide a standalone annuity option, while others offer annuity-enhanced target-date funds. Blackrock is the largest provider of the latter, and Vanguard unveiled its own version this month.

In simple terms, these are target-date funds that allocate some of your money toward a future annuity purchase. Target-date funds overall start out invested aggressively when you’re far from retirement and gradually shift to less risky investments as you get closer to retirement.

“There are certain plans that have adopted those [annuity-enhanced TDFs], but it hasn’t been at huge scale,” Copeland said.

Roughly $29 billion is invested in these funds, which is a tiny fraction of the more than $4 trillion invested in target-date strategies, according to Morningstar.

And, Copeland said, “it’s still a savings vehicle. You have to choose to take the income part of it, and we don’t know yet what people will do.”

In other words, annuitization won’t be automatic — the person will have to actively choose to use the money for an annuity.

“We won’t know the overall benefits of these until we see how they are used,” Copeland said.