When you retire or separate from an employer in 2026, deciding what to do with your 401(k) remains one of the highest-impact financial choices you’ll make. This updated guide drills into the “split” strategy—part roll, part retain, part convert—and explains how to execute it now, with current tax and regulatory context, practical checklists, and concrete examples tailored to retirement planners and enthusiasts.

Who should read this and why it matters

This article is for retirement planning enthusiasts who want actionable, up-to-date guidance on dividing a workplace 401(k) among an IRA, in‑plan options, and Roth conversion pathways. In 2026 more plans offer in‑plan guaranteed income and Roth features; at the same time, RMD and Medicare premium rules still produce tax-timing traps. A deliberate split strategy can preserve creditor protection, create a stable income floor, and manage future taxable spikes.

Prerequisites / What you should know first

  • SECURE Act 2.0 (2022) remains the key statutory backdrop: required minimum distribution (RMD) age is 73 for most retirees through 2032; other SECURE 2.0 provisions (catch-up contribution changes, in‑plan Roth features) have shifted plan design options.
  • Basic tax forms and rules you should recognize: Form 1099‑R (rollovers/distributions), Form 5498 (IRA contributions/rollovers), and Form 8606 (reporting nondeductible IRA basis for after‑tax funds).
  • Medicare IRMAA is income‑based and determined using a two‑year lookback on modified adjusted gross income—large Roth conversions can drive higher Part B/D premiums in later years.
  • Creditor protection differs: 401(k)s generally enjoy ERISA protection; IRAs’ protection varies by state and federal bankruptcy rules.

Why consider a split strategy in 2026?

Since 2023, plan sponsors and recordkeepers have expanded in‑plan guaranteed‑income options, Roth in‑plan conversion windows, and broader brokerage windows. A split strategy lets you:

  • Match assets to functions: Keep money that buys lifetime income inside the plan; move growth and legacy dollars to IRAs for broader investment choices and Roth conversion flexibility.
  • Preserve creditor protections: Retain balances in an employer plan if ERISA protection is an important consideration for your profession or personal risk profile.
  • Manage tax timing: Stage Roth conversions from rolled balances across low‑income years to reduce lifetime tax bill and lower future RMD-driven spikes.
  • Retain optionality: Leaving some dollars in the plan preserves access to in‑plan annuities, loan features (if still permitted), or other unique plan-level features.

Step 1 — Inventory the plan and your entire balance

Before moving money, gather granular facts. Treat this like a forensic audit:

  1. Balance by tax type: pre‑tax (traditional), Roth 401(k), and after‑tax (non‑Roth) contributions. Get historical contribution dates if possible.
  2. Plan features: does the plan offer in‑plan annuities, a brokerage window, in‑plan Roth conversions, or a lifetime income sub‑account? Ask whether the plan supports partial rollouts or only full distributions after separation.
  3. Fee and investment comparison: get current expense ratios and service fees for the plan menu and compare with the IRA custodians you’re considering.
  4. Distribution mechanics: can the plan do trustee‑to‑trustee transfers? Are there blackout periods, required paperwork, or minimums for in‑plan annuity purchases?
  5. After‑tax tracking documentation: request history that will let you prove basis later (plan statements and any custodian notes that show contribution vs. earnings).

Why this matters

Missing a line item (for example, after‑tax basis) can convert a tax‑neutral rollover into a taxable event later. Trustee‑to‑trustee transfers avoid mandatory 20% withholding that occurs with direct pay‑outs to you.

Step 2 — Assign goals to each slice

Decide what each portion of the plan should do. A simple three‑slice framework works well:

  1. Income floor (guarantee): Funds to buy an annuity or left in‑plan to provide steady payments.
  2. Tax‑efficient growth / conversions: Pre‑tax balances rolled to a traditional IRA for staged Roth conversions during low‑income years.
  3. Legacy / flexible investments: After‑tax and Roth balances moved to Roth IRAs or rollover IRAs for estate planning flexibility and tax‑free growth.

Updated practical example — Leah and Omar (Sept 2026)

Leah (67) and Omar (66) separate from a company retirement plan with a combined 401(k) balance of $900,000: $660,000 pre‑tax, $140,000 after‑tax non‑Roth, and $100,000 Roth 401(k). Their plan offers an in‑plan single‑life annuity option and permits in‑plan Roth conversions of after‑tax dollars.

Possible split they implement:

  • Leave $300,000 pre‑tax in the plan to purchase a partial in‑plan annuity producing predictable lifetime income—this secures a base covering essentials while preserving ERISA protection.
  • Direct‑roll $360,000 pre‑tax to a traditional IRA to allow staged Roth conversions over several years when their taxable income is intentionally kept lower.
  • Roll the $140,000 after‑tax contributions to a rollover IRA and file Form 8606 to preserve basis tracking, then convert the earnings piece to Roth over two years using trustee‑to‑trustee transfers.
  • Transfer the $100,000 Roth 401(k) to a Roth IRA to avoid future RMDs (Roth IRAs have no lifetime RMDs for original owners).

Step 3 — Compare annuity yield vs. portfolio withdrawal — updated considerations

Don’t rely on rough rules alone. Compare the guaranteed yield from an in‑plan annuity to a reasoned withdrawal strategy from an IRA using these steps:

  1. Calculate the annuity’s effective yield: the plan should provide a written quote showing payout, survivor options, and how payments may change with inflation if any cost‑of‑living features exist.
  2. Model a conservative withdrawal: run a sequence‑of‑returns stress test or use a proven withdrawal model (e.g., guardrails or dynamic spend) rather than a single “4% rule” figure.
  3. Factor in non‑financial benefits: ERISA protection, guaranteed longevity risk transfer, and the psychological value of a predictable payment stream.

In 2026, annuity pricing and bond yields have moved since 2024; always get current in‑plan quotes and compare them to a personalized spending model run by your advisor or using reliable planning software.

Step 4 — Updated tax, RMD and Medicare considerations

Key 2026 tax and RMD points:

  • RMDs: For most people RMDs start at age 73 under SECURE Act 2.0 rules currently in effect. Leaving pre‑tax money in the employer plan may allow you to delay RMDs if you are still working for that employer and meet plan rules—confirm with the plan administrator.
  • Roth strategy: Converting to a Roth IRA removes converted amounts from future RMDs and shifts taxation to the conversion year. Because Roth IRAs grow tax‑free, conversions can provide long‑term tax control.
  • Medicare IRMAA and lookback: Roth conversions raise modified adjusted gross income (MAGI) and can trigger higher Medicare Part B/D premiums—but IRMAA uses a two‑year lookback, so conversions affect premiums with a lag. Coordinate conversion timing to avoid unintended IRMAA spikes in critical years.
  • State taxes and residency: Taxes on conversions and withdrawals vary widely. If you plan to move states in retirement, model conversions under both state tax regimes and consider staged conversions before relocation.

Step 5 — Legal protections and special circumstances

ERISA protection for amounts held in your employer plan remains a major reason to leave funds in a 401(k). IRA protection under federal bankruptcy law is separate and many states have additional exemptions for IRAs—check with counsel if liability or bankruptcy risk is material. Other special circumstances that require specialist input include:

  • Employer stock with net unrealized appreciation (NUA) planning
  • Multi‑state tax residency or significant real estate holdings
  • Large planned Roth conversions (seven figures) or complex estate plans

Step 6 — Execution: how to implement the split in 2026

  1. Obtain written quotes and documentation from your plan administrator: annuity contract samples, current account statements with tax‑type breakdowns, and detailed instructions for partial rollovers.
  2. Open accounts at a custodian that supports trustee‑to‑trustee transfers, after‑tax basis tracking, and provides robust reporting (custodians vary in their ability to accept in‑kind after‑tax transfers).
  3. Execute trustee‑to‑trustee transfers for any rollovers to avoid mandatory withholding and to maintain clean tax records.
  4. If buying an in‑plan annuity, get the contract language in writing, confirm start dates, survivor options, and whether the plan insures payouts via an insurer or an internal book‑entry arrangement.
  5. For Roth conversions, create a multi‑year conversion plan tied to projected income, Social Security timing, and Medicare IRMAA exposure; coordinate with your CPA on estimated tax payments to avoid underpayment penalties.
  6. Keep meticulous records for after‑tax contributions (Form 8606) and any in‑plan Roth conversions—errors here are costly later.

Common mistakes and how to avoid them

  • Mistake: Rolling Roth 401(k) monies into a traditional IRA (tax trap). Fix: Keep Roth 401(k) to Roth IRA, or confirm with plan and custodian before transfer.
  • Mistake: Neglecting after‑tax basis documentation. Fix: Collect plan records and file Form 8606 when appropriate; insist the plan provide an after‑tax contribution history.
  • Mistake: Large Roth conversions in a single year without modeling IRMAA and state tax effects. Fix: Stage conversions across years and simulate Medicare premium impact and state tax consequences.
  • Mistake: Buying an irreversible annuity without independent pricing comparison. Fix: Get multiple quotes, evaluate survivor options, and consider a partial annuitization rather than an all‑or‑nothing decision.

Pro tips

  • Test run taxes: use your tax preparer or software to model conversions and RMDs over a 10–15 year horizon, including IRMAA and state taxes.
  • Leverage low‑income years: conversions are cheapest in years with low taxable income (e.g., pre‑SS start, business gaps, or in early retirement years before RMDs).
  • Use Roth conversions to manage beneficiaries’ tax exposure: Roth IRAs can simplify inheritance rules for many heirs by removing future taxable RMDs (post‑SECURE changes still require distributions for many beneficiaries, but the distributions can be tax‑free if Roth).
  • Confirm custodian support for after‑tax basis tracking before initiating a rollover—some custodians make basis tracking difficult, increasing future compliance workload.

Decision checklist — updated for 2026

  • Inventory balances and confirm tax types with plan statements.
  • Request in‑plan annuity quotes and proof of ERISA protections.
  • Model annuity yield vs. a stress‑tested IRA withdrawal plan.
  • Estimate staged Roth conversions across low‑income years and model Medicare IRMAA and state tax effects.
  • Confirm trustee‑to‑trustee transfer mechanics and get written confirmations for all moves.
  • Keep records (Form 8606, 1099‑R, 5498) for after‑tax and conversion transactions.

When to consult a specialist

Contact a fee‑only retirement specialist, CPA, or ERISA attorney if you have employer stock, large after‑tax piles, potential creditor risk, planned interstate moves, or when multi‑year Roth conversion totals exceed six figures. These professionals can run the detailed tax, IRMAA and estate simulations necessary for major split decisions.

Bottom line

In 2026, a split 401(k) strategy remains a practical, often superior alternative to “roll everything” or “cash out.” With broader in‑plan guaranteed income options and evolving plan features, you can marry income certainty, creditor protection, and tax control. The work lies in a disciplined inventory, modeling the annuity vs. portfolio tradeoff, staging conversions to control taxes and IRMAA exposure, and executing trustee‑to‑trustee transfers with meticulous documentation.

FAQ

Can I roll my Roth 401(k) into a Roth IRA and avoid future RMDs?

Yes. Rolling a Roth 401(k) to a Roth IRA removes those dollars from Roth 401(k) RMD rules. Roth IRAs have no lifetime RMDs for original owners, so a direct trustee‑to‑trustee Roth rollover is typically a good move if you want to avoid RMDs later. Confirm with your plan that a direct rollover is permitted and request the proper paperwork.

What happens to after‑tax contributions if I roll them to an IRA?

After‑tax (non‑Roth) contributions maintain their basis when moved correctly, but you must document that basis (Form 8606 for IRAs). If you plan future Roth conversions of after‑tax amounts, push for a clean trustee‑to‑trustee transfer and collect the plan’s after‑tax contribution history to avoid double taxation.

Will leaving funds in my 401(k) protect them from creditors?

Generally, yes—ERISA plans usually provide strong federal protections against many creditor claims. IRAs have different protections that vary by state and federal bankruptcy law. If creditor exposure is a real risk (medical practice, litigation), prioritize leaving at least some funds in an ERISA‑covered plan and consult an attorney.

How do Roth conversions affect Medicare premiums (IRMAA)?

Roth conversions increase your modified adjusted gross income (MAGI) in the conversion year and can therefore raise future Medicare Part B/D premiums because IRMAA uses a two‑year lookback. Model conversions across years and avoid large conversions immediately prior to the year you expect to enroll in Medicare if you cannot absorb higher premiums.

Is a partial in‑plan annuity irreversible?

Most immediate annuity purchases are irreversible. Some plans offer phased or deferred guaranteed‑income options with limited reversibility—get contract language in writing, compare alternative annuity offers, and consider buying only a portion of the income you need to keep flexibility.