Rich Bean, President and CEO of The Retirement Advisors in Manchester, NH, has guided thousands of corporate retirees through the transition from active employment to retirement income. The single decision with the largest downstream effect on the next thirty years, in his experience, is what to do with the 401(k) balance when leaving the employer. For retirees from companies like IBM, Verizon, Raytheon, Anheuser-Busch, and Lockheed, the account often represents the largest pool of money the household has ever managed. With more than $11.5 trillion held in 401(k) plans nationwide according to the Investment Company Institute, the choices made in the first ninety days after retirement determine how flexibly that money can be deployed for income, taxes, and estate purposes for the rest of the retiree’s life.
The questions below capture the decisions that come up most often in those conversations, and the framework for thinking through each one.
Question 1: Should I Leave the Money in My Old Employer’s Plan?
Sometimes, yes. Leaving the balance in the existing 401(k) preserves access to the plan’s investment lineup and creditor protections, which can matter in certain states. The drawback is that withdrawal options are typically limited to what the plan allows. Many corporate plans restrict retirees to lump-sum or annual distributions rather than the flexible monthly income strategies most retirees actually need. Investment options are also constrained by the plan menu, which may include only a few fund choices.
There is one scenario where staying put has a specific advantage. The Rule of 55 allows employees who separate from service in or after the year they turn 55 to take penalty-free withdrawals from that employer’s 401(k) before age 59 1/2. This provision does not transfer to an IRA. For early retirees who need access to those funds before 59 1/2, leaving the balance in the plan, at least temporarily, can preserve that flexibility.
Question 2: What About Rolling It Into an IRA?
For most retirees past 59 1/2, this is the move that creates the most flexibility. An IRA rollover dramatically expands the investment universe and the income flexibility. The retiree gains access to virtually any mutual fund, ETF, individual stock, bond, or annuity, and can structure withdrawals on any schedule that fits their cash flow needs. The rollover itself is a non-taxable event when done as a direct trustee-to-trustee transfer.
The tradeoff is the loss of certain plan-specific features, including the Rule of 55 mentioned above and, in some states, stronger creditor protections under federal ERISA rules. For most retirees in their mid-sixties or older with no significant litigation exposure, the flexibility gain outweighs those tradeoffs.
Question 3: Is It Ever a Good Idea to Take a Lump-Sum Cash Distribution?
Rarely. Taking the entire balance as cash creates an immediate ordinary income tax liability on the full amount, often pushing the retiree into the highest federal bracket and eliminating decades of tax-deferred growth in a single year. The exception is the specific case of company stock held inside the 401(k), discussed in the next section. Outside that scenario, retirees who took lump sums on the recommendation of someone other than a fiduciary advisor have lost 35 to 40 percent of the balance to federal and state taxes in the same year.
Question 4: I Have a Lot of Company Stock in My 401(k). Is There a Special Strategy?
Yes, and it is the one situation where a lump-sum distribution can be the right move. Net Unrealized Appreciation, or NUA, is an IRS-recognized tax election that allows the retiree to take the company stock as an in-kind distribution to a taxable brokerage account, paying ordinary income tax only on the original cost basis of the shares. The appreciation, often the bulk of the value for long-tenured employees, is then taxed at long-term capital gains rates when the shares are eventually sold.
A representative case, identifying details changed: an Anheuser-Busch retiree held $400,000 in company stock inside his 401(k), with an original cost basis of $80,000. By electing NUA at separation rather than rolling the full balance to an IRA, he paid ordinary income tax on the $80,000 basis in the year of distribution, and the remaining $320,000 of appreciation was eligible for long-term capital gains treatment when the shares were sold. Comparing the two paths over a projected 15-year holding and drawdown period, the NUA election produced an estimated $40,000 to $60,000 in tax savings versus a standard IRA rollover, depending on the assumed sale schedule and bracket assumptions.
NUA is not the right choice in every case. The strategy requires a qualifying lump-sum distribution from the plan, specific timing rules, and a careful analysis of how long the retiree expects to hold the shares before selling. Modeling the NUA decision against a standard rollover is part of the planning conversation for every client with company stock, factoring in the basis percentage, expected holding period, and the retiree’s projected tax bracket in retirement.
Question 5: When Should I Convert Some of This to a Roth IRA?
The years immediately following retirement are often the lowest-income years of a retiree’s adult life, particularly for those who delay Social Security to 70 and have not yet begun required minimum distributions at 73. Per the Social Security Administration, delaying past full retirement age earns a delayed retirement credit of 8 percent per year up to age 70. The bracket space during those low-income years is one of the most valuable planning assets a retiree has.
Rather than rolling the entire 401(k) balance into a traditional IRA and leaving it to compound, a more deliberate approach involves rolling the balance into the IRA and then converting a portion to a Roth IRA each year over the early retirement window. The amount converted is taxable in the year of conversion, but at the lower bracket the retiree currently occupies. The converted balance then grows tax-free, withdraws tax-free, and is not subject to required minimum distributions during the original owner’s lifetime.
For a retiree who expects to be in a higher bracket later, either because of pension income, Social Security, RMDs, or surviving spouse status, converting at the lower current rate is a meaningful tax savings. The optimal conversion amount each year is usually calibrated to keep the retiree within the 22 or 24 percent federal bracket while maximizing the balance moved into the Roth structure.
Question 6: How Will RMDs Affect All of This?
Required minimum distributions begin at age 73 under current law for traditional IRAs and 401(k)s, per the IRS final regulations effective in 2025. The amount required each year is calculated based on the prior year’s December 31 balance and an IRS life expectancy factor. For retirees with large 401(k) balances rolled into IRAs, these distributions can be substantial and can push taxable income into higher brackets, increase Medicare premiums through the IRMAA surcharge, and increase the portion of Social Security subject to taxation.
Roth IRAs are not subject to RMDs during the original owner’s lifetime, which makes Roth conversion planning during the pre-RMD window even more valuable. A retiree who converts $200,000 from a traditional IRA to a Roth IRA over five years between ages 65 and 70 has reduced the balance generating future RMDs by that amount, and those funds now grow tax-free indefinitely.
Question 7: What About My Beneficiaries?
This is the question many retirees postpone, and it has become more consequential since the SECURE Act passed. The IRS final regulations finalized in 2024 confirm that most non-spouse beneficiaries who inherit an IRA from someone who passed in 2020 or later must fully distribute the account within 10 years of death. The old stretch IRA, which allowed distributions over the beneficiary’s lifetime, is no longer available outside of a few eligible designated beneficiary categories.
For retirees with large IRA balances and adult children as beneficiaries, the 10-year rule can compress a significant tax liability into the heir’s prime earning years, often at higher marginal rates than the original owner ever paid. Roth conversions during the retiree’s lifetime, properly sequenced, can transfer that tax liability to a lower-bracket year and pass tax-free assets to the next generation. The downstream value to heirs is often greater than the upfront tax cost of the conversion.
The Cost of Postponing the Decision
Many retirees postpone the rollover analysis because the existing 401(k) feels familiar and the new employer plan or IRA feels like a complication. The cost of waiting is rarely visible on the account statement. It shows up later, in restricted withdrawal options when income flexibility is most needed, in missed Roth conversion windows that cannot be recreated, in NUA opportunities that lapse after the qualifying distribution timing passes, and in higher RMD-driven tax bills in the seventies and eighties.
The first year of retirement is the planning window. The income picture is transitioning, the bracket is typically lower than it has been in decades, and the retiree still has years before RMDs begin. Treating the rollover analysis as the foundation of the broader retirement income strategy, rather than as a paperwork task to be completed after the fact, is what separates retirees who spend the next thirty years on offense from those who spend them on defense.
Rich Bean is the President and CEO of The Retirement Advisors, based in Manchester, NH. Over 35 years ago, he began his career in financial services, and 26 years ago, he started his own financial planning firm, which includes The Retirement Advisors. He has helped retirees from major employers, including IBM, Verizon, Lockheed, Anheuser-Busch, Raytheon, and dozens of others with 401(k) rollover strategy, retirement income planning, and tax reduction, serving New England and beyond. Learn more at retirement-advisors.com.