The 401(k) Rule That Matters Most Once You're Within 1 Year of Retirement

Your retirement years are supposed to be your golden years, a time when you can finally relax and enjoy your decades of hard work. However, in order for your retirement days to be truly enjoyable, it's important to plan appropriately.

If you're in your last year of working, there's one 401(k) rule that matters most that you need to know about. Additionally, there have been several 401(k) retirement plan policy changes that may impact your retirement age and income strategy. Here is more information about it, so you can go enjoy your transition into the next phase of your life.

The 401(k) rule that matters most: shifting asset allocation

Many financial experts recommend that you shift your investments to a more conservative asset allocation the closer you get to retirement. If you haven't done that yet, your last year of working is a good time to do so. What may have worked for growing your account up to this point might not be the strategy that works best in retirement.

This is the 401(k) rule that matters most because it can help preserve your hard-earned retirement investments for the long haul. The brokerage firm, Charles Schwab, recommends that if you're age 60-69, consider having 60% stocks, 35% bonds, and 5% cash, and then between 70-79, shifting to 40% stocks, 50% bonds, and 10% cash.

Confirm vesting status on any employer contributions

Another important step to take in your last year of working is to confirm the vesting status on employer matching contributions that you've received. Each employer has a different vesting schedule for matching contributions. Some offer immediate vesting, for example, while others require you to work for three or more years before the matching funds are legally yours.

If you plan to retire within one year, check your vesting status to ensure you have full ownership of all your retirement funds. Otherwise, you may have to forfeit employer-matched money in your 401(k).

Maximize your catch-up contribution opportunities

As of 2026, workers have more opportunities to maximize catch-up contributions. Catch-up contributions are a great way to give your retirement funds one last top-up before leaving the workforce. For 2026, those ages 50 to 59 can contribute $8,000 in addition to their 401(k) maximum. Employees aged 60-63 can contribute an extra $11,250.

In addition to maxing out 401(k)s, this is also the last opportunity for many workers to contribute to a Roth IRA.

Stay up to date on RMD policy updates

An important part of retirement planning is following RMD policies closely. RMDs are required minimum distributions. That means that by a specific age, set by law, you must withdraw money from your retirement account. The Secure 2.0 Act changed the RMD age to 73, and it will go up again to 75 in 2033.

If you're not sure when to make your first RMD, consult with a financial planner who can guide you on the best time based on your lifestyle needs, financial goals, and tax strategy.

How to avoid a large tax hit in year one of retirement

Knowing when you'll make your 401(k) withdrawals is important because they can increase your overall taxable income. When you retire, you may have multiple streams of income, including Social Security, 401(k) withdrawals, and other investment or business income. A financial planner or an accountant can help you make your withdrawals in the most tax-efficient way.

Review and update all beneficiary designations

Your last year of working is also a good time to review and update all your beneficiary designations on your accounts. This is especially important if one of your beneficiaries has recently passed, you went through a divorce or marriage, or you added a child or grandchild to your family.

If you haven't made an estate plan yet, this is also a good time to do so. Having this paperwork completed before you retire can give you a sense of peace as you transition out of working.

Tips to ease the transition to a fixed retirement income

One last step to make the transition to retirement better is to practice living on your expected retirement income during your final year of work. Many workers struggle to transition from a salary to a fixed income, as it can be stressful knowing that you're drawing down on a lifetime of savings.

However, you can prepare by tracking your spending, allocating a specific amount to live on each month, and budgeting as needed. This is also a good time to build an emergency fund to help avoid going into debt for unexpected expenses during your retirement years.

Bottom line

Your last year of working is a good time to ensure you are prepared to retire. By checking to see if your retirement savings are fully vested, developing a withdrawal strategy, and, if needed, hiring a financial advisor, you can hopefully eliminate some money stress within your retirement plan.

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