While you technically CAN take all of your 401(k) money out in a lump sum distribution upon retirement, it may not be in your best interest to do so. Not all employers allow retirees to remain active participants in their 401(k) plans, but if yours does, it is important to consider all your options. In addition to taking all your money out of a 401(k) account at once, you may also be able to:

  • Leave your money parked in the plan
  • Roll the money into an IRA
  • Take periodic distributions
  • Purchase an annuity through a sponsor-recommended insurer

When You Should Take All Your Money Out of a 401(k)

If you are a skilled investor or have access to financial advice, a lump sum payment can help you:

  • Better control your lifestyle to travel or live a more comfortable, upscale life.
  • Have the opportunity to make your own investments to leave a legacy.
  • Pay off your existing debts and mortgage or pay for a new home in cash.
  • Feel more confident, no matter what the market does, knowing the set value of your savings.

In some cases, your employer’s 401(k) plan may require you to take the lump sum of cash – for instance, if you have less than $5,000 invested in the plan. However, there are options for what you can do with that money, and there is no rule preventing you from reinvesting.

Are There Any Reasons NOT to Take a Lump Sum 401(k) Payment?

There are a number of reasons NOT to take a lump sum payment. You could wind up with a huge tax bill, fail to make your money stretch as long as it needs to, or spend all of it in one fell swoop.

  • Responsibility – Once you withdraw that money, you alone become responsible for making these funds last throughout your retirement.
  • Diminished Value – If the interest rate rises, the overall value of your nest egg will diminish unless it’s parked in an account that generates higher annual returns.
  • Tax Liability – Also, unless your 401(k) is a Roth account, you will be expected to pay the full income tax on the amount (usually about 20%). If you are under 59.5, you may also owe an additional 10% early withdrawal tax penalty.

Alternate Options for Receiving 401(k) Money in Retirement

Rather than taking and keeping a 401(k) lump sum, you have four other options.

Leave the money in your 401(k) account

Financial advisers often recommend leaving as much money as possible in your account, where the money can continue growing tax-deferred with compounding interest. You can leave 100% of the account intact until age 72, when Uncle Sam requires you to take at least the Required Minimum Distribution each month. While you cannot continue contributing to a 401(k) held by a previous employer, your plan administrator is required to maintain your balance if you have more than $5,000 invested.

Rolling money into an IRA

If your plan’s 401(k) investment choices are limited or have performed poorly, you may be better off directly rolling that money into an IRA now that it is free. A direct IRA rollover may also be a good idea if you retire before age 59.5, as it allows you to avoid the 10% early withdrawal penalty from the IRS. Thanks to the SECURE Act, you can now contribute to an IRA indefinitely.

There are two main advantages to leaving your money parked in the 401(k) as opposed to opening an IRA: money touched in the 401(k) cannot be touched by lawsuits or bankruptcy courts, and 401(k) fees are typically lower.

Periodic distributions

A 401(k) plan allows you the flexibility to receive monthly or quarterly distributions to cover your living expenses. You can typically change the amount at least once a year, though it depends on how your plan is written. Regular withdrawals are not subject to the 20% automatic withholding, but keep in mind that any non-Roth distributions will be taxed as regular income. Required Minimum Distributions kick in at age 72, with the amounts based on account balance and life expectancy.


Buying an annuity based on some or all of your 401(k) guarantees you income for the rest of your life. You don’t have to worry about how that source of income is invested, and your spouse can even receive a portion of the payments after your death. Unfortunately, annuities are not adjusted according to inflation, so you may find bigger returns working with an adviser. If you die soon after retirement, most of your money will go to the insurance company, rather than your heirs. You may not have as much bargaining power as an individual buyer, so you’ll have to choose your annuity provider and plan carefully to act as a true pension program.

Get financial guidance from your 401(k) plan provider

Whether it’s best to take a lump sum or one of the other options depends on your personal goals and circumstances. Sometimes it’s best to talk with an expert one-on-one to determine the right course of action. Small business 401(k) plan provider Ubiquity offers retirement planning and financial wellness resources for both employers and employees to help our clients feel more secure in their futures.