401(k) Options at Retirement: Rollovers, Withdrawals and Annuities

Your five 401(k) options

You can combine them: many people roll part of their 401(k) into guaranteed income and leave the rest invested.

Leave it in your old plan

Most plans let you leave a balance over $7,000 where it is. You keep the plan's funds and its legal protections, but many plans limit how and when you can take money out, and some only allow all-or-nothing withdrawals.

Roll it into an IRA

A direct rollover moves the money into an IRA in your name, with no tax due and nothing withheld. It opens up far more choices, including annuities, and lets you set your own income schedule.

Move it to a new employer's plan

If you're still working somewhere else, that plan may accept it. That keeps everything in one place, with the new plan's funds and rules.

Take withdrawals or a lump sum

Money you take out is taxed as ordinary income in the year you take it. A check paid to you has 20% withheld for federal tax, and before age 59½ a 10% penalty can apply, unless you left that employer in or after the year you turned 55.

Turn part of it into guaranteed income

Roll part of your 401(k) into an annuity held as an IRA. It stays tax-deferred, and depending on the annuity it can protect that money from market drops, lock in a rate, or pay you a set income for life.

Traps worth knowing before you move it

Ask for a direct rollover. If the plan makes the check out to you, 20% is withheld. You then have 60 days to deposit the full amount, including the 20% you never received, or the missing part is taxed as a withdrawal.
The rule of 55. Leave your employer in or after the year you turn 55 and you can take money from that employer's 401(k) without the 10% early-withdrawal penalty (age 50 for some public safety workers). Roll it into an IRA first and that exception is gone: for IRAs the penalty-free age is 59½.
Company stock. If your 401(k) holds your employer's stock, ask about net unrealized appreciation (NUA) before you roll it. Moving it the usual way can mean paying more tax on it later.
Required minimum distributions. Withdrawals become mandatory at 73, or 75 if you were born in 1960 or later. An annuity can be set up to cover them.
Loans. An unpaid 401(k) loan usually becomes due when you leave. If it isn't repaid, the balance is treated as a withdrawal and taxed.

401(k) questions

Can I roll my 401(k) into an annuity without paying tax?

Yes, when it's done as a direct rollover into an annuity set up as an IRA (sometimes called a "qualified" annuity). The money stays tax-deferred, and you pay income tax only on what you take out later.

Should I roll my 401(k) over at all?

Not necessarily. Leaving it in the plan can make sense if you like its funds and costs and don't need much flexibility. Rolling over makes sense when you want something the plan can't give you, such as guaranteed income or protection from market drops, or simply want your accounts in one place. The review compares both.

How much income could my 401(k) give me?

It depends on your balance, your age when income starts, whether income should cover one life or two, and the option you choose. The assessment gives a licensed professional what they need to show you real numbers for your situation.

I'm still working. Is it too early to look?

Not if you're within a few years of retiring. Some annuities grow for a set number of years before income starts, so the earlier you plan, the more options you have. Many plans also allow "in-service" rollovers from age 59½ while you're still working.

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