Retirement Retirement Planning

The 401(k) Rule That Matters Most in Your Last Year Before Retirement For Older Workers

This will help you avoid costly mistakes when you retire.

By Catherine Collins , Edited by Kristy DeSmit

Updated April 15, 2026

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Your last year of work is an incredibly exciting time. After all, you're almost at the finish line, which you've been working towards your entire career. Your last year of work before retirement is also one filled with big decisions.

One of the most important decisions is making a withdrawal strategy, which includes timing when you'll use the money accumulated in your retirement plans. There are many things to consider, including required minimum distributions, Roth conversions, and tax considerations.

Here is some more information about what you need to do to prepare for retirement during your final year of employment.

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The importance of RMDs, including new 2026 rules

An RMD is a required minimum distribution that retirees must take from their retirement accounts. While the RMD age used to be 72, the SECURE 2.0 Act raised the age to 73, and it will rise again to 75 in 2033.

Retirees have a choice when it comes to their first required RMD. They can either take their first distribution the year they turn 73 or delay it until April 1 of the year after. This choice is a bit more complex than it seems on the surface.

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Why workers need to time their retirement and first RMD

Delaying your first RMD sounds appealing because it gives your retirement accounts even more time to grow and compound.

However, it means taking two full RMDs in the same calendar year, which can push you into a higher tax bracket. This can be problematic when it comes to other important retirement costs, such as Medicare IRMAA surcharges.

How to avoid the two RMDs in one year trap

The best way to avoid these Medicare IRMAA surcharges in the future is to take the time to plan when you'll take your first RMD. Your final year of work is a good time to map out your strategy and seek help from a professional if you need it. Planning ahead like this can make your transition into retirement smoother and your income more predictable.

The goal is to balance having enough income to meet your needs in retirement while also ensuring you aren't paying too much in taxes (which can cut into your cash flow).

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Employees who work until age 73 are a unique exception

There is one interesting exception to the RMD rules. If you're still working at age 73 (and don't own 5% or more of the business yourself), then you can delay RMDs until you decide to officially retire.

The important caveat is that this doesn't apply if you have old 401(k)s from other employers or a Traditional IRA. It's only for the 401(k) you have and are contributing to at your current job.

The final-chance Roth conversion window

Because many people stop working somewhere in the middle of their last year of retirement, that lower annual income sometimes makes them eligible to convert 401(k)s to a Roth IRA without using a backdoor Roth IRA strategy.

For most retirees, the final year of work will be the last opportunity to contribute to a Roth, as you have to have earned taxable income in order to do so.

Tips to ease the transition to a fixed retirement income

In addition to planning your retirement withdrawal strategy, another tip to ease your transition is to practice living on your retirement income in your last year of work. Many people live on less during retirement than they did during their working years.

To prepare, start tracking expenses and allocating a certain amount each month to live on, so that the transition to retirement is smoother. Consider using any extra funds you may have in your last year of work to reduce high-interest debt, so you have fewer payments in retirement.

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Where to get advice on your last year of employment

Even if you've never worked with a financial advisor before, getting advice during your last year of work can help you map out your income and withdrawal plan as you transition to retirement.

A financial planner can help you choose which accounts to withdraw from first and decide whether or not you should delay your first RMD.

Bottom line

Ultimately, in order to have a stress-free retirement, taking the time to plan for it is essential. That includes mapping out your withdrawal strategy, including when you will take RMDs from your 401(k).

Retirement is an exciting time for many people and something employees work towards all their lives. However, not being prepared for RMDs and potentially higher tax bills can put a damper on your early retirement years. That's why it's essential to consult a financial planner if you want to start planning during your final year of work.

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