You've Been Saving Into Your 401(k) for 30 Years. Now What?
Many people spend their entire career focused on accumulation mode with their 401(k). Contribute. Watch it grow. Repeat.
Then retirement approaches and suddenly the purpose of the account often shifts. The account that was always supposed to grow now needs to start doing something else: produce income. And a lot of people aren't sure exactly how that transition fits into their broader retirement income picture. For many retirees, this transition raises new questions.
Your 401(k) doesn't just disappear at retirement
This might sound obvious, but it's worth saying: your 401(k) doesn't go anywhere when you stop working. You still own it. The question is what you do with it.
You have a few options. You can leave it in your former employer's plan — which sometimes makes sense if the plan has great investment options and low fees. You can roll it into an IRA, which typically gives you more control and flexibility. You can begin taking withdrawals directly. Or you can use it as part of a coordinated income strategy alongside Social Security and other accounts.
Each path has different tax implications, different flexibility, and different implications depending on individual circumstances.
The rollover question
Rolling a 401(k) into an IRA is a common choice at retirement — but it is not automatic and may not be appropriate for everyone. It may simplify account management, and may expand your investment options, depending on the provider.
Some 401(k) plans offer institutional investment options that are cheaper than what you'd get in an IRA. Some have protections that matter in certain situations. And if you're between 55 and 59½ when you retire, you may be able to take penalty-free withdrawals from your 401(k) that does not apply if you roll it to an IRA.
The rollover decision is worth thinking through — not just assuming it's the obvious move.
Withdrawals and the sequence problem
Here's the thing nobody tells you until it matters: not all withdrawals are equal. When you take money from your 401(k), how much you take, when you take it, and what else you're taking income from at the same time — all of that affects your taxes and your long-term outcome.
For example, in a hypothetical scenario, a client planning to take Social Security at 65 and start 401(k) withdrawals at the same time. When we ran the numbers, combining those two income sources in the same year pushed him into a higher tax bracket than necessary. By slightly adjusting the timing — and drawing down the 401(k) in the years before Social Security started — total taxes over time may be reduced, depending on personal circumstances and tax law in effect.
Small decisions can have real impact.
The required minimum distribution reality
Under current tax law, required minimum distributions (RMDs) generally begin at age 73 for most retirement accounts. These distributions are treated as taxable income and must be taken whether or not the funds are needed for living expenses.
For individuals with sizable retirement balances, RMDs may affect tax brackets or other items tied to income, such as Medicare premiums. Planning ahead for future RMDs—sometimes several years in advance—may help reduce unexpected tax consequences, though outcomes will depend on future tax rules and individual financial factors.
If retirement is getting close
This is the moment when your 401(k) deserves a real look — not just a glance at the balance, but a conversation about how it fits into everything else. It's one of your most important assets. It should be part of a plan, not just an afterthought.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.