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Retiring from a Small Business: 401(k) options founders and sellers should know

sstartups

2026-01-29

11 min read

Clear, actionable 401(k) exit guidance for founders: stay, roll over, cash out, NUA, and M&A implications to protect your retirement.

Facing a business exit and unsure what to do with your 401(k)? Here’s a concise, practical guide.

When you sell or hand off a small business, the 401(k) you built as a founder or long-time employee is often treated like a second closing table: full of choices, tax traps, and operational steps that affect your net proceeds and peace of mind. This guide cuts through the noise and lays out the real options—stay, roll over, cash out—plus the M&A and operational implications you must negotiate during a transaction in 2026.

Quick takeaways (the inverted pyramid)

Primary choices: leave the account with the plan (if allowed), roll it into a rollover IRA or your new employer’s plan, or take a cash distribution.
Tax impact: cashing out usually triggers ordinary income tax + possible 10% early withdrawal penalty; rollovers preserve tax deferral; Roth conversions have immediate tax cost for future tax-free growth.
Employee stock: special NUA (Net Unrealized Appreciation) rules can yield large tax savings for company stock held in a 401(k) at distribution—plan this before closing.
M&A angle: buyers and sellers must negotiate plan treatment (termination, merger, adoption) and include clear timelines and escrow language for benefits distributions.
Actionable first step: get your plan document, the latest Form 5500, participant statements and a list of investments and outstanding loans—do this now, not after you sign a letter of intent.

Why 2026 is different: three trends every seller should know

Digital portability and auto-rollover services: Fintech providers and recordkeepers rolled out improved auto-rollover and IRA onboarding tools in late 2024–2025, making rollovers and forced distributions faster and cheaper than before. Expect smoother transfers—but verify fees and settlement timing.
Deal teams focus on benefits due diligence: Small-cap M&A advisers and private acquirers increasingly treat retirement plans as deal points. Buyers now insist on clear language in purchase agreements describing how the 401(k) will be handled and the timing for plan termination or merger.
Tax strategy is now a closing negotiation: More sellers use tailored tax timing (Roth conversions, strategic rollovers, NUA elections) to maximize after-tax proceeds at exit. With tax law volatility since the early 2020s, this has become an active part of deal planning rather than an afterthought.

The four practical options for your 401(k) at exit

1) Leave the money in the employer plan

Some plans allow former participants to keep accounts after separation of service. This is often the simplest option if your plan has low fees, good investments and you prefer continuity.

Benefits: No immediate tax event, familiar investment lineup, sometimes ERISA-level creditor protection remains in place.
Drawbacks: You’re subject to the plan’s investment menu, potential higher administrative fees, and limited control compared to an IRA. If the acquiring company chooses to terminate the plan or merge it, your status can change.
Action step: Confirm whether the plan permits former-employee accounts and get the plan’s current fee schedule and investment lineup in writing.

2) Rollover to a Rollover IRA

Rollover to an IRA is the most common move for sellers who want investment choice and consolidated retirement assets.

Benefits: Broader investment options, ability to consolidate multiple plans, potential to lower fees, flexible distribution strategies.
Drawbacks: IRAs generally offer different creditor protections than ERISA-qualified plans (ERISA protections can be stronger in bankruptcy scenarios). Roth conversion decisions require upfront tax payments.
Operational note: Use a direct trustee-to-trustee rollover (direct rollover) to avoid mandatory 20% withholding and an unintended taxable distribution.
Action step: Open the IRA first, instruct the plan administrator to do a trustee-to-trustee transfer, and confirm transfer timing and any interim tax reporting.

3) Rollover to a new employer’s 401(k)

If you’re being acquired and will be an employee of the buyer (or you’re joining a new employer), rolling into the new plan can be good—especially if the new plan has low fees, strong fiduciary oversight, or you want to keep all assets under ERISA protection.

Benefits: Continue ERISA protections, potential access to employer matching or profit-sharing in the new plan, centralized savings.
Drawbacks: New plan might have limited investment selection or higher fees; some buyers temporarily freeze new contributions after an acquisition.
Action step: Ask the receiving plan to confirm acceptance of incoming rollovers and compare fund options and costs versus an IRA.

4) Cash out (take a distribution)

Cashing out is tempting—it converts retirement assets into immediate cash for post-sale needs. But the tax price can be steep.

Immediate tax: Distributions are taxed as ordinary income. If you’re younger than 59½, expect an additional 10% early withdrawal penalty unless you qualify for an exception.
Withholding: Employers frequently withhold 20% on eligible rollover distributions unless you do a direct rollover to an IRA.
When cashing out may make sense: small balances where taxes and penalties are acceptable, or when you need immediate funds and other sources are exhausted. Also sometimes used strategically to manage tax brackets in the year of sale.
Action step: Model the after-tax proceeds with your tax advisor before electing a cash distribution, and consider partial rollovers plus partial distributions if you need liquidity.

“Leaving distribution decisions to the post-close scramble is a common—and costly—mistake. Lock these choices into the SPA and your benefits timeline early.”

Special considerations for founders and sellers

Company stock and NUA (Net Unrealized Appreciation)

If you hold employer stock in your 401(k), the NUA strategy can produce material tax savings. Under NUA, you take a lump-sum distribution of the employer stock: you pay ordinary income tax on your cost basis, and then any appreciation is taxed at long-term capital gains rates when you sell the stock.

When NUA may be optimal: large appreciation in company stock, you expect lower capital gains taxes, and you can manage liquidity to pay the ordinary income on basis.
When NUA is not ideal: if the cost basis is low but you need immediate cash and want to avoid capital-gains timing, or if you plan to roll everything into an IRA to keep tax-deferral intact.
Action step: Run the NUA math with your tax advisor before deciding. NUA must be elected at the time of distribution and requires a one-time lump-sum—don’t miss the timing tied to your closing documents.

Loans and outstanding deferrals

Active 401(k) loans are typically treated as taxable distributions if not repaid or rolled over at separation of service. Loan offsets can automatically convert the unpaid loan balance into a distribution that could be taxable.

Action step: Decide whether to repay outstanding loans before closing or structure the SPA so that loan offsets are handled in a tax-efficient way.

Vesting schedules and treatment of employer contributions

Before signing, map every participant’s vested balance. An acquirer may negotiate who keeps what based on the purchase structure and whether they assume the plan.

Action step: Produce a vesting schedule and a participant balance report for due diligence. Consider whether accelerated vesting will be part of retention bonuses or deal consideration.

M&A: Plan-level and transactional mechanics you must negotiate

Common buyer preferences

Terminate the seller's plan pre-close or shortly post-close to simplify integration.
Adopt seller participants into buyer’s plan to standardize benefits.
Push for representations and warranties that the plan complies with ERISA and tax rules, backed by indemnities or escrow.

Seller protections you should request

Clear allocation of responsibility for plan liabilities discovered in due diligence.
Timebound transition for participant communications and distributions so participants are not left in limbo.
Escrow or holdback language to cover unexpected plan liabilities, missing Form 5500s, or nondiscrimination failures.

Operational timeline checklist for closing

Provide buyer with current plan documents, IRS determination letter (if available), Form 5500, and recent audit reports.
Decide how employer contributions, final payroll, and matching are handled around the closing date.
Negotiate the timing for participant notices, termination (if any), and distribution windows.
Specify treatment of loans and outstanding contributions in the SPA.
Confirm who will pay plan termination costs, administration fees, and distribution processing fees.

Tax planning moves to consider before close (practical and date-sensitive)

Partial rollovers: Roll a portion to an IRA now and leave the rest in plan if you expect seller-paid benefits or if NUA planning is desirable for company stock.
Roth conversion timing: If you expect higher tax rates in future or foresee long investment horizons post-sale, convert part of your 401(k) to Roth (pay tax now, shelter growth). Coordinate with your sale year to manage tax brackets.
NUA election: If you hold company stock, compare lump-sum + NUA versus rolling to IRA using scenario modeling with a CPA.
State taxes and residency shifts: If you move states after the sale (common for retirees), model state tax implications on distributions; moving states before a taxable distribution can materially change your tax bill.

Practical checklist: what every founder should assemble now

Latest plan document and summary plan description (SPD)
Recent Form 5500 and audit packets
Participant statement and balance history
List of outstanding loans and payoff terms
Recordkeeper contacts and fee disclosures (confirm platform and cloud setup with your recordkeeper; see enterprise cloud patterns for recordkeepers)
Details of any employer stock and plan’s handling of employer securities
Vesting schedule and participant eligibility records
Contact for the plan’s TPA (third-party administrator) and ERISA counsel

Two real-world scenario sketches

Scenario A: SaaS founder (age 52) sells to strategic buyer, holding company stock in 401(k)

Maya has $850k in her 401(k), including $450k of employer stock with a low basis. She’s below 59½. Options:

Roll everything to an IRA: preserves tax deferral; no immediate tax, but later sales taxed as ordinary income on distributions.
NUA: take a lump-sum distribution of the employer stock, pay ordinary tax on basis only, and capitalize the appreciation at long-term capital gains when shares are sold. Potentially large tax savings. Requires planning around liquidity to pay ordinary tax on basis.
Action: Model both outcomes with a CPA and tie the chosen path into the SPA to ensure distribution timing aligns with the sale.

Scenario B: Manufacturer owner (age 64) selling to private equity, no employer stock

Tom is over 59½ and needs part of the proceeds for transition costs. He can:

Take partial cash distributions (no 10% penalty due to age) and roll the remainder to an IRA to keep tax deferral on the bulk.
Convert a measured amount to Roth in the sale year to manage future RMDs and tax diversification.
Action: Coordinate distribution elections to capture favorable tax brackets and solidify any Roth conversion numbers before closing.

How to manage the conversation with buyers and advisors

Benefits are a key part of due diligence. Put retirement-plan items on the initial data request and negotiate plan treatment in the LOI/SPA. Make these checklist items non-negotiable:

Who pays for plan-related liabilities discovered after close?
How will participant notices and communications be handled?
What’s the timeline for distributions, rollovers and plan termination?

When to get professional help (and who to call)

Multi-disciplinary advice is essential. At minimum, involve:

A CPA or tax advisor with experience in retirement distribution and Roth strategies
An ERISA/employee-benefits attorney for plan termination, spinoff and NUA questions
A benefits consultant or broker to compare incoming plan adoption vs. termination
Your M&A attorney—insist the SPA address plan items specifically

Common pitfalls to avoid

Waiting until post-close to decide—timing can turn a rollover into a taxable event.
Failing to model state taxes when you relocate after a sale.
Ignoring company stock planning—NUA opportunities are time-sensitive.
Assuming buyer will automatically adopt or merge your plan—get the commitment in writing.

Final checklist before you sign anything

Confirm plan options and thresholds (are former-employee accounts permitted?).
Get investment fee schedules and a copy of the plan’s fee disclosure.
Run distribution scenarios (cash-out vs. rollover vs. NUA) with your CPA.
Negotiate SPA language on plan termination/adoption, indemnities, and escrow for plan liabilities.
Schedule a meeting between your CPA, benefits counsel and the buyer’s benefits contact to align timelines.

Closing thoughts — protect the retirement you built

Exiting a small business is as much about preserving retirement capital as it is about selling the company. In 2026, tighter benefits due diligence, better digital portability and more sophisticated tax strategies mean you can craft an exit that maximizes after-tax cash while protecting long-term retirement wealth. But that requires planning, early negotiation, and the right advisors.

Next step: Don’t leave your distribution decision to the last minute. Gather your plan documents, schedule a meeting with your CPA and benefits counsel, and request our 401(k) Exit Checklist & M&A Benefits Playbook to guide the next 60 days.

For templates, advisor referrals and a benefits due-diligence checklist tailored to small businesses selling in 2026, visit startups.direct or contact our team to get curated resources and vetted plan consultants.

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