Costco Professionals · Retirement Planning
What should I do with my Costco 401k when I retire?
Gevers Wealth Management · Issaquah, WA
You are nearing or just retired after a long career with Costco. When you sit down and take stock of your finances, there often is a feeling of "What should I do?"
The decisions that you make now can have a downstream effect on your overall retirement plan, so it's important to approach this with intentionality. Costco professionals have unique tax strategies available to them within their 401k so looking at your options before you make any decisions is prudent. Our firm is a mile away from Costco HQ, and we've helped many Costco professionals navigate this. Here is what we typically recommend:
First let's take a look at your options:
After you retire, there are a few different things you are able to do with your T. Rowe Price 401k.
1
You can keep the funds within the 401k.
There is no requirement to do anything with your Costco 401k. Some folks elect to keep their nest egg where it has been for decades to keep things simple and utilize the same investment mix that they've had.
It is important to check the expense ratio of the funds that you hold in your 401k in case they are on the higher end, which is possible. The T. Rowe Price target date funds have an approximate expense ratio of 0.51%. It is likely that you could find more cost-effective options if you were to roll the 401k to an IRA. More about this below.
If you retire before 59.5, electing to keep some funds within the 401k may make sense if you need the money to start funding your retirement. Why? You are able to take penalty free withdrawals from the 401k starting at age 55. We've advised a handful of Costco retirees to keep some assets within their plan to use for their retirement paycheck until age 59.5.
2
You can roll over the funds to an IRA
Most people tend to choose this route, depending on their age. When you roll the funds over to an IRA, which is a non-taxable event if completed in 60 days, you have access to a broader menu of investment options. On top of this, getting anything done is much simpler. Withdrawals are simpler, Roth conversions are simpler, and there are fewer restrictions/guidelines to follow.
And, as stated earlier, it's likely you could reduce the fees you are paying on the funds you hold. There are typically always more cost effective options available to you in an IRA vs a 401k.
3
You can take a lump sum distribution
This is an option, so I am listing it, but it's not great. The entire lump sum is taxable to you at ordinary income rates, which likely increases the amount of taxes you would otherwise pay.
4
NUA Strategy.
This one is important, as it is uniquely available to Costco professionals. What we've seen over the years is that many tenured employees have built up a large position of COST stock within their 401k.
Costco stock has performed well for decades now, which means the stock within your 401k could be substantial, even 7 figures. The basis, or the amount the stock was bought for can be very low, sometimes as low as $100-$200 a share. As this article is written, COST stock is around $950 a share.
This is where Net Unrealized Appreciation comes into play. NUA is a unique strategy that allows you to separate your COST stock from the remainder of your 401k and move it to a taxable brokerage account, rather than an IRA.
The benefit of doing this is that it allows you to change the tax treatment, which often is very beneficial.
Here's how it practically looks:
You have a $2.3m Costco 401k.
$1m of the 401k is in COST stock that has a basis of $160.
When you retire, you can roll the $1.3m of the 401k that is in normal investments to an IRA, which is standard. All the funds that move to the IRA are taxable as ordinary income when withdrawn. Ordinary income rates look like this:
Ordinary Income Rates
10%12%22%
24%32%35%37%
On the remainder of your 401k, which is the $1m COST stock, you are able to roll this over to a taxable brokerage account.
When you do this, your basis, approximately $168,000, is taxable to you as ordinary income.
But the growth, approximately $832,000, is only taxed when sold at capital gains rates. Capital gains rates look like this:
Capital Gains Rates
0%15%20%
As you can see, capital gains rates can be materially less than ordinary income rates. If you strategically walk through this (recommended with a CPA and/or a financial advisor) you may be able to reduce your overall retirement tax bill by up to 5 figures.
Conclusion
You have a myriad of options available to you. Retirement is an exciting life transition, but one that should be handled with delicate care. Educating yourself on what's available to you is a great place to start. You've got this!
Need Help Putting This Together?
We work with Costco employees to build financial strategies around real-life decisions — not just retirement, but tax savings, college planning, and growing long-term wealth.
If you want a clear plan for where your money should go and how to make it work harder for you, feel free to book a free consultation with our team here.
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