What Should You Do With Your 401(k) When You Retire?

As older workers approach retirement, one big question looms: What should you do with your 401(k) once you retire?

You generally have two options: You can roll over your retirement savings into an Individual Retirement Account (IRA), or you can leave the money in your former employer’s plan. (Of course, cashing out is another option, but it's usually the least attractive choice if you're trying to delay taxes and avoid penalties.)

In 2023, around 25 million households had IRAs that included rollovers from former employer plans, according to the Investment Company Institute. However, more companies are encouraging employees to keep their retirement savings in the employer plan. Data from Vanguard Group shows that nearly half of the people who left their jobs last year kept their money in their 401(k) plans, and about a quarter of those aged 60 and over still had funds in their old company’s 401(k) five years after leaving.

This decision requires careful thought, as each option has its own set of pros and cons. A study I conducted with John Turner and Catherine Reilly explored some key factors to consider. Here’s a breakdown of the advantages of each choice:

Rolling Over to an IRA

More Investment Options

One of the main benefits of rolling over your 401(k) into an IRA is access to a broader range of investment choices. IRAs often offer more options than a typical 401(k), including exchange-traded funds (ETFs), which often have lower fees. Plus, if you’re interested in buying individual stocks and bonds, an IRA gives you that flexibility, while most 401(k)s lean towards mutual funds. IRAs can also hold “unconventional” assets like precious metals, real estate, and hedge funds—investments you usually won’t find in an employer-sponsored plan.

Streamlined Accounts

If you have several 401(k) accounts from previous employers, rolling them all into one IRA can simplify your financial life. Managing your portfolio and tracking your investments becomes easier, and you won’t need to juggle multiple account numbers and passwords. While many 401(k) plans allow you to roll over past retirement savings into your current 401(k), combining everything into one IRA can also simplify matters for your family when they need to help with eldercare, nursing homes, or managing your estate.

More Flexible Payouts

IRAs usually offer more flexible payout options than 401(k)s. Your former employer might limit how much, and how often, you can withdraw from your 401(k), and they might not allow you to vary your withdrawal amounts. In contrast, IRAs give you the freedom to withdraw what you like, without having to prove hardship to take a distribution. Keep in mind, though, that IRA withdrawals are subject to income tax, and there’s a 10% penalty for withdrawals before age 59½.

With an IRA, you can also purchase an annuity to generate a steady income stream for life—something that’s not commonly offered in 401(k) plans. However, this is changing, as new rules under the Secure Act and Secure 2.0 Act now allow 401(k) plans to include payout annuities in their investment options.

There’s also a potential issue with financial advisers who might steer clients away from annuities in IRAs because they can earn higher commissions elsewhere. But a new rule from the Labor Department requires anyone giving rollover advice to act in the saver’s best interest, which might help address this problem—though it’s currently facing challenges from some industry groups.

Rolling Over To A Crypto IRA

An IRA allows you to invest in more assets not usually offered in a 401K like cryptocurrencies. A Crypto IRA has additional benefits:

Potential for High Returns:

Cryptocurrencies have shown the potential for significant growth. Bitcoin, for example, has gone up 13,993.70% in the last 8 years. No other asset comes close.

Protection Against Inflation

Some investors view cryptocurrencies like Bitcoin as a hedge against inflation or currency devaluation, which could be beneficial in a retirement portfolio.

Innovation and Future Financial Systems

By investing in cryptocurrencies, you’re participating in what could be the future of finance, including decentralized finance (DeFi) and blockchain technology, which might not be accessible through traditional retirement accounts.

INVEST IN CRYPTO NOW

Sticking with Your 401(k)

Lower Costs and Fees

When it comes to investment costs, employer-sponsored 401(k) plans usually have the edge over IRAs. By keeping your retirement savings in your company’s plan, you might benefit from lower fees, which can translate into better returns over time.

For example, a study found that retirees moving money from a large employer plan (with more than $1 billion in assets) to an IRA could end up paying an extra 0.35% in annual fees. While typical employer plans charge between 0.20% and 0.25% in adviser fees annually, IRAs often charge around 1%. Those lower fees could outweigh any benefits of investing in low-cost ETFs through an IRA, depending on how much of your money is in those ETFs.

Even though robo-advisors are a lower-cost option—charging a quarter to a half percent of assets under management—they typically offer fewer investment choices.

Most 401(k) plans also provide access to low-cost target-date funds, which automatically adjust the investment mix as you age. This means that as you get older, your investments are automatically shifted into safer assets, without you having to lift a finger—something that’s less common in IRAs. However, costs can vary across employer plans, so it’s important to compare your options.

Another perk of sticking with your 401(k) is that many employers are working harder to keep 401(k) accounts, even after employees retire. This benefits everyone by lowering costs through economies of scale. Larger companies, in particular, can negotiate better deals with record-keepers and money managers—something you might struggle to do on your own with an IRA.

Stronger Fiduciary Protections

One big advantage of keeping your money in a 401(k) is the fiduciary protection you get. Your employer is legally required to act in your best interests when managing the plan’s investment choices and costs, something you might not get with an independent financial advisor.

Plus, 401(k) assets are protected from bankruptcy claims, whereas IRA funds are not. This could be crucial if you face financial challenges later in life.

Access Your Money Sooner

If you need to access your retirement funds early, a 401(k) offers more flexibility. Many employer-sponsored plans allow you to withdraw money as early as age 55 without penalty, whereas the earliest you can tap into an IRA without a penalty is 59½.

Another benefit is that you can delay taking required minimum distributions (RMDs) from your 401(k) as long as you keep working for the company offering the plan, allowing you to defer income taxes. In contrast, IRAs require you to start withdrawing money at age 72 (or 73 if you reach age 72 after Dec. 31, 2022).

Some employers also allow retirees who leave their money in the plan to take out loans, giving them access to quick cash without the usual withdrawal penalties or immediate tax consequences.

Simplicity and Peace of Mind

For many retirees, too many investment choices can be overwhelming, leading to poor decisions. Research has shown that many people over 50 don’t fully understand key financial concepts like risk diversification and portfolio management. The most vulnerable groups include women, the less-educated, nonwhites, and those aged 75 and over, who often have less in retirement savings.

For those who aren’t financially savvy, sticking with a 401(k) can simplify things. In an IRA, you’re responsible for managing your own money, including navigating the tax consequences of trading unusual assets. This can get complicated, especially if you don’t have a tax professional to help you.

Other Considerations

When deciding between a 401(k) and an IRA, don’t forget to think about estate planning. With an IRA, your money goes to your named beneficiary or to your estate if no beneficiary is listed. But with a 401(k), at least half of the remaining assets must go to a surviving spouse unless you’ve given written permission for it to go elsewhere. Whether this is an advantage depends on your marital situation and preferences.

Additionally, a nonspouse inheriting a 401(k) usually has to take and pay taxes on the remaining money within 10 years. If you don’t name a beneficiary and have no surviving spouse, your 401(k) assets will likely be included in your estate and go through probate, which can be complex and costly.

In the end, the choice between sticking with your 401(k) or rolling over to an IRA depends on your financial knowledge, how much you’ve saved, and the structure and costs of your options.