Retirement Retirement Planning

What Happens to Your 401(k) in the First Year After You Retire

It's not all about sleeping in and pursuing hobbies.

By Catherine Collins , Edited by Laura Hohenstein

Updated May 20, 2026

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During your first year of retirement, there are a lot of decisions you have to make with respect to your retirement plans. Not only do you have to choose how much to live on in your first year, but you also have to make decisions about where to keep your 401(k) and what order to withdraw from different accounts.

Here is more information about what happens to your 401(k) in your first year of retirement and why this time is more important than many people think.

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Your first year of retirement is more important than people expect

When you think of your first year of retirement, you might envision long days filled with hobbies and fun.

However, being retired doesn't mean that your 401(k) decisions are behind you. In fact, the choices you make during your first year of retirement are incredibly important for your future.

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Employees have many choices when it comes to their 401(k)s

One of the first decisions you'll have to make in retirement is whether or not to leave your 401(k) money in your employer's plan, roll it over to an IRA, or take a lump sum.

Each choice has different benefits, drawbacks, and tax consequences. For example, many people decide to roll over their 401(k) into a self-directed IRA. However, that decision wouldn't be beneficial to someone who is retiring under the rule of 55, which requires workers to leave their 401(k) with their employer.

A lump-sum distribution can trigger a big tax bill

Before you decide to take the lump-sum option when you retire, make sure you understand the drawbacks of the decision. Generally, people make withdrawals each year to live on as opposed to taking their full 401(k) balance all at once. That's because taking your full balance can create a large tax bill since 401(k) withdrawals are taxed as income.

This is true even for people who leave a job and plan to work for a new employer. If they take the lump sum, there is a mandatory 20% federal withholding. That means they'll be short the amount needed to deposit the funds with their new employer.

If these workers are under age 59 1/2, they could be subject to early withdrawal penalties if they aren't able to deposit the full amount with their new employer.

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New RMD laws may impact your withdrawal strategy

If you're in your first year of retirement, and you're not sure whether or not to make your first 401(k) withdrawal, it's a good idea to stay up-to-date with RMD laws.

Just recently, the RMD age changed to 73, up from 72. So, retirees have one more year to allow their investment accounts to grow before they are legally required to make a withdrawal.

Withdrawal sequencing can reduce your tax burden

Because retirees are not required to withdraw from their 401(k) until age 73, many financial experts recommend withdrawing from taxable accounts before tax-deferred accounts. This is often called withdrawal sequencing.

Withdrawal sequencing and making a plan for how to use your retirement funds and in what order can potentially reduce your tax burden.

Other tips for maximizing your first year of retirement

In addition to planning your 401(k) withdrawal strategy, here are some other tips for maximizing the first year of retirement.

First, if your employer auto-rolled your small balance into a default IRA, make sure that your money is actually invested in the market.

Secondly, if you have high-interest debt, spend the first year of retirement paying off that debt, if possible. Freeing up your cash flow by paying down debt and getting used to living on less can help you be more financially sound during your golden years.

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Where to get help for managing your finances in retirement

Managing your 401(k) during your first year of retirement can feel overwhelming. After all, you work for decades and contribute to your retirement account automatically. Then, once you retire, you are responsible for deciding what to do with your 401(k), making a withdrawal strategy, and ensuring that your nest egg lasts.

If you're not sure whether or not you're on track, you can work with a financial planner. A financial planner can listen to your goals and walk you through some of these big decisions.

Bottom line

Your first year of retirement is an incredibly exciting time, but it's important to make the right financial decisions to set yourself up for many decades of a stress-free retirement.

During the first year of retirement, you'll have to make important decisions involving your 401(k), withdrawal planning, and spending habits. Taking the time to prepare for this and asking a financial planner if you have questions can help your retirement portfolio last longer.

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