Option 1
Leave it where it is
If your former employer's plan allows it, your 401(k) may remain in place after you retire.
- When it is taxed
- As you withdraw
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Summary
When your paychecks stop, your 401(k) is often one of the largest accounts you need to make a decision about. You generally have three paths: leave the money in your former employer's plan, roll it into an IRA, or take it out as cash. Each one carries different costs, investment choices, tax consequences, and rules about when you may access the money.
This post walks through each option, the factors worth comparing before you decide, and where California tax treatment differs from federal rules.
Federal tax rules and thresholds discussed below are based on tax year 2026 rules available as of October 2026.
What Are My 401(k) Options When I Retire?
Option 2
Roll it into an IRA
A direct rollover to a Traditional IRA is generally not a taxable event. Rolling into a Roth IRA is a different decision with different tax consequences, covered below.
- When it is taxed
- Traditional: as you withdraw. Roth: in the year you convert
Option 3
Take a cash distribution
Cashing out generally adds the pre-tax balance to your taxable income in a single year, unless special rules such as NUA treatment for company stock apply.
- When it is taxed
- All at once, in one tax year
These options are not mutually exclusive. You might leave funds in your 401(k) for a period of time, then roll some or all of it into an IRA once you have reviewed your broader retirement picture.
Should I Roll My 401(k) Into an IRA?
The answer often comes down to how your specific plan compares with an IRA on the factors below.
How Do 401(k) Fees Compare With an IRA?
Many modern 401(k)s are more cost-competitive than they once were, but some still carry higher record-keeping and administrative fees. Your plan's annual participant fee disclosure may clarify the full picture.
The fund options in your plan also deserve careful review:
- Some 401(k)s include institutional share classes with very low expense ratios, which may be lower than those available in a retail IRA. Plans may also charge administrative or record-keeping fees, so the total cost of your specific plan is worth comparing rather than assuming the plan is cheaper. Lower expenses reduce costs, but they do not guarantee better performance.
- Others may not offer funds with competitive expense ratios.
- Beyond expense ratios, mutual funds may also carry shareholder fees such as sales loads (front-end or back-end), redemption fees, and account maintenance or inactivity fees.
Compare this with an IRA:
- IRAs may offer low-cost ETFs, mutual funds, or CDs.
- Some 401(k)s offer institutional share classes that are not available in retail IRAs.
If your 401(k) carries higher total costs, moving funds to an IRA may be worth exploring. If its share classes, expense ratios, and administrative fees compare favorably with IRA options, leaving it in place could be reasonable.
Fees may look small in any single year, but over 10 to 20 years they may meaningfully reduce what your savings grow to.
Control & Ease of Use
401(k): Some plans may be cumbersome to manage, with limited trading windows, fewer rebalancing tools, or a less user-friendly platform.
IRA: IRAs generally provide more control, including broader investment options and more flexibility around partial Roth conversions.
Investment Options
401(k): Usually limited to a curated fund lineup. That may be helpful if the lineup is strong, since fewer choices may simplify decisions. For more on building a retirement portfolio, see How a Solo Financial Advisor Builds Your Portfolio in Santa Rosa.
IRA: A much wider range of choices, including individual stocks, bonds, ETFs, and CDs. More options bring more flexibility, but also more due diligence. See What Should I Look For in a Financial Advisor?.
Some 401(k) plans also offer a brokerage window. For example, certain plans at Charles Schwab offer a Personal Choice Retirement Account (PCRA), which allows access to a wider range of investments, though not every option available in a regular brokerage account. Your plan's documentation describes what is and is not available. This example illustrates a feature some plans offer and is not a recommendation of any provider.
Should I Consolidate Old 401(k)s?
If you have several old 401(k)s from former employers, consolidating into one IRA, or into a current employer's 401(k) if it accepts roll-ins, may simplify tracking, rebalancing, and withdrawals.
Consolidation may also make it easier to coordinate investments across accounts, for example holding bonds in tax-deferred accounts and stocks elsewhere, an approach known as asset location.
Beneficiary designations do not carry over when money moves to a new account, so reviewing them after any rollover is worthwhile. See Your Beneficiary Designations on Retirement Accounts.
How Does Creditor Protection Differ?
401(k) plans covered by ERISA generally receive broad protection from creditors under federal law.
IRA protection depends on applicable federal and state law, the type of claim, and whether bankruptcy is involved. In bankruptcy, federal law generally protects IRA funds, and amounts rolled over from employer plans generally keep that protection without the dollar cap that applies to contributory IRAs. Outside of bankruptcy, California law treats retirement assets differently depending on the type of account and whether the funds remain in the plan or have already been distributed. Certain retirement funds receive broad statutory protection, while some IRA funds are protected only to the extent a court finds them necessary for support in retirement.
Even ERISA protection has limits, for example for certain federal tax claims or court orders for family support. How much protection a given account receives depends on the facts, so this is an area where coordinating with an attorney may be worth considering.
Does My 401(k) Hold Company Stock?
If your 401(k) holds appreciated stock of your employer, net unrealized appreciation (NUA) rules may allow the growth on those shares to be taxed at federal long-term capital gains rates rather than as ordinary income, if IRS requirements are followed. Rolling the shares into an IRA generally gives up that treatment, so the decision is commonly reviewed before any rollover. California taxes capital gains as ordinary income, so the state-level benefit differs. See NUA Strategy for Company Stock in 401(k).
Charitable Giving (QCDs)
IRAs allow Qualified Charitable Distributions (QCDs). 401(k)s do not.
Under federal law as of October 2026, IRA owners age 70½ or older may give directly to qualified charities from an IRA through a QCD.
QCDs may count toward your RMD and are excluded from federal adjusted gross income, which may help manage the federal tax on Social Security benefits and Medicare premium surcharges. California does not tax Social Security benefits, so that particular effect applies at the federal level only. For more, see No Taxes on Social Security: California & Federal Guide and Ways to Increase Your Social Security Benefit.
When Do I Have to Take RMDs From My 401(k)?
Under federal law as of October 2026, required minimum distributions from traditional IRAs and 401(k)s generally begin at age 73 for those born from 1951 through 1959 and at age 75 for those born in 1960 or later.
If you are still working for the employer that sponsors your 401(k), you may generally delay RMDs from that plan until the year you retire, unless you own 5% or more of the business. This exception does not apply to IRAs or to plans from former employers.
That provision may make leaving funds in a current employer's plan, or rolling old accounts into it, worth considering if you plan to work past your RMD age.
RMDs set a minimum, not a maximum. Once they begin, the required amount counts as federal taxable income whether you need the money or not, which may leave less room in lower tax brackets for other income. Withdrawals or partial Roth conversions in the years before RMDs begin may reduce the balance that future RMDs are calculated from. Those earlier withdrawals also add to taxable income, the federally taxable share of Social Security, and Medicare premium thresholds in the year they happen, so the timing is commonly weighed across several years rather than one at a time.
For more on planning withdrawals across account types, see Tax-Efficient Withdrawals in Retirement and Pay Zero Federal Tax on $100k Retirement Income.
Can I Roll My 401(k) Into a Roth IRA?
Generally yes, but the tax treatment depends on which dollars you move:
- Pre-tax 401(k) dollars: rolling these into a Roth IRA is a Roth conversion. The full amount is added to your federal and California taxable income for that year.
- After-tax contributions: these may generally be rolled into a Roth IRA without additional tax. Earnings on those contributions are taxable if converted, or may be directed to a Traditional IRA instead.
- Roth 401(k) balances: these may generally be rolled into a Roth IRA without tax.
A large conversion in a single year may push income into a higher bracket, increase the federally taxable share of Social Security, and raise Medicare premiums two years later through IRMAA. Spreading conversions across several lower-income years is one way some retirees manage those effects.
Should I Cash Out My 401(k) When I Retire?
A full cash distribution can create a large immediate tax bill. The result depends on the amount, any after-tax basis, available exceptions, your other income, and whether special tax rules apply:
- The taxable portion is generally treated as ordinary income in one year at both the federal and California levels. A large distribution may push part of that income into higher marginal tax brackets than gradual withdrawals would.
- Plans generally must withhold 20% for federal income tax when a distribution that could have been rolled over is paid directly to you. That amount is withholding, not the final tax, and may be more or less than what you owe. A direct rollover to an IRA is generally not subject to this withholding.
- If you take money out before age 59½, a 10% additional federal tax and a 2.5% additional California tax may apply to the taxable portion, unless an exception applies. California does not follow every federal exception, so a distribution exempt from one may still be subject to the other.
- Under the Rule of 55, if you separate from service with your employer during or after the calendar year in which you turn 55, distributions from that employer's 401(k) are generally exempt from both the 10% federal additional tax and the 2.5% California additional tax. The exception is tied to that plan and that separation, so it does not make every distribution from the plan penalty-free in every circumstance. Funds rolled into an IRA generally lose access to this plan-based exception, although other exceptions may still apply to IRA distributions before 59½. How a given withdrawal fits your broader tax picture depends on your circumstances.
How Should I Decide?
There is no single answer that fits every retiree.
If your 401(k) has low fees and strong investment options, leaving it in place could make sense.
If you value more control, easier consolidation, and access to QCDs, rolling into an IRA may be worth considering.
A full cash distribution can concentrate a large amount of taxable income into a single year, so it may be worth weighing carefully against the other two paths.
The decision also depends on your tax situation, company stock, charitable goals, health, and family needs. Because these factors interact, the choice tends to work better as part of a coordinated plan that is revisited after major life changes.
A concrete place to start: request your plan's annual participant fee disclosure and compare the expense ratios and administrative fees on the funds you hold with comparable options available in an IRA. If you hold company stock, check its cost basis before making any rollover decision. For guidance tailored to your situation, consider working with a fiduciary financial advisor.