Approaching retirement? There are probably many things on your mind besides your 401(k). However, what you do with your retirement account in the years leading up to retirement could affect your financial well-being for years to come, so it’s worth your time and attention.

What should you do with your 401(k) when you retire? Broadly speaking, you have two tax-smart options: stay in your plan or move the money to an individual retirement account (IRA). Which approach is right for you depends on your circumstances. For either path, there are multiple factors you should keep in mind, including investment options, taxes, and recordkeeping.

Staying in Your Plan

Assuming your employer allows for this option, you can choose to keep your 401(k) account in your employer’s plan. There are lots of potential benefits to staying in your plan. For one thing, there are no immediate tax consequences.

There can be other advantages too, such as:

  • You may be able to access more affordable mutual fund options in your employer’s plan.
  • Generally, 401(k) plans provide greater protection from the claims of creditors than IRAs.
  • You may be able to access the money in your account without the usual 10 percent early-withdrawal penalty if you retire or otherwise separate from service and you’re 55 or older (age 50 for public safety employees).

But there are also potential disadvantages to staying in your plan, including the following:

  • Your employer may limit your investment options, offer only expensive options, or reduce the investment options you have access to after retirement.
  • Aspects of your plan could change, including your investment options, if your employer undergoes a merger or acquisition.
  • You won’t be able to continue making contributions.

Moving to an IRA

Another option is to move—or roll over—your account balance to a traditional IRA. Depending on the circumstances, you may be able to transfer the money directly from your 401(k) to an IRA. In other cases, your employer will send you a check for the entire amount. Then it becomes your responsibility to redeposit the funds into your IRA.

There are several benefits to an IRA. IRAs typically offer more flexibility and investment options than 401(k)s. Many financial services companies, including registered investment advisors, banks, and mutual fund companies, offer IRAs. And if you have had multiple 401(k) plans through multiple employers, you can consolidate them into a single account.

With an IRA, you typically can get access to your funds when you want, though tax rules still apply, and you have greater control of your saved money. You can set up any number of IRAs and designate one beneficiary for each one. But with a 401(k), you are typically allowed to designate only one beneficiary for your account. That means, from an estate-planning perspective, an IRA may offer more flexibility. You may want to use part of your IRA assets to buy an immediate annuity. The annuity option generally pays you a fixed amount throughout your life. Note that a federal law enacted in 2019 generally lets 401(k) plans provide annuity income options too.

There are also some disadvantages to an IRA. For instance, you’ll need to pay attention to specific time windows for completing the rollover, and if you miss them, you’ll have to pay the tax consequence. If you plan to move your money to an IRA, be sure to follow the proper procedure.

Additional Options

  • Moving some of your money to an IRA and leaving the rest of the money in the plan.
  • Leaving your nest egg inside your 401(k) temporarily until you make a final decision.
  • Using periodic withdrawals from your 401(k) to serve as “a bridge” until you finally start collecting Social Security benefits.

Start weighing the factors long before you retire so you don’t feel tempted to rush. Also, consider talking with your financial and tax advisors to ensure you choose the solution that’s right for you.