Your Costco 401(k) Hit $1 Million: Now What?

If your T. Rowe Price balance now shows $1 million, you're probably feeling a few different things right now: excitement, and possibly some nerves or uncertainty. These are all normal.

You did it the slow way. Thirty years of shifts, a deferral every paycheck, and Costco adding its own contribution on top: 4% of pay after your first year, rising to 9% once you pass 25 years. It's why the Wall Street Journal ranks Costco's 401(k) among America's most generous. Costco's CFO has said thousands of its U.S. hourly employees now have more than $1 million in their 401(k)s.

Crossing the seven-figure threshold is a big deal, and it's something you should be proud of. It takes discipline to get there. But maybe you're in your late 50s or early 60s and asking yourself: "Is this enough?"

This guide is designed to help you answer that question in more detail. We are financial advisors based in Issaquah, WA, where Costco is headquartered, and we've helped many Costco employees with $1M+ 401(k)s navigate retirement.

This article will help you think through your next steps as you continue to save and ultimately plan for retirement, whenever that may be.

What's next for you?

If you knew you had a big enough nest egg to clock in for your last shift tomorrow, would that change how you approach work, and life in general?

Most of the time, the answer is yes. I think this is the most important piece of this entire article. The answer is different for everyone, but sometimes you're able to retire sooner than you think. We can help you answer this question.

Retirement is an exciting life transition, and it prompts many questions that don't seem to have clear answers. This guide was created to bring clarity to what retiring from Costco might look like for you, and how to start laying the foundation in a strategic way.

The question most people skip

Before looking at any numbers, we recommend some intentional thinking about how you want your retirement to look. We've seen many people skip this part, and a few weeks after their last day, they look around and ask: "Now what?"

When we guide people into and through retirement, we always look at it through the lens of their life goals. Maybe you'd like to travel, volunteer with an organization you love, or simply play golf (which I am all for). Understanding your goals also shapes the financial approach you take when creating a retirement plan.

Step 1: Take inventory

Get organized. Here are the key things you'll want to have in place as you prepare your finances for retirement from Costco.

Retirement planning checklist

• Income plan: where does the paycheck come from now?
• Expense baseline: what do you actually spend?
• Tax strategy: your bracket changes. Does your plan? (We cover this in our Costco retirement tax planning webinar.)
• Investment allocation: accumulation and distribution require different portfolios.

Decisions with deadlines

• Social Security: when to claim, and in what order if you're married.
• Healthcare: how are you covered between now and Medicare at 65?
• Estate plan: are your documents current and your beneficiaries correct?
• RMD planning: what does the tax picture look like when required minimum distributions begin at 73, or at 75 if you were born in 1960 or later?

Income plan: replace your paycheck

This is one of the most important pieces of a retirement plan. Once your paycheck stops, you need a system to fund your life expenses. It feels much better to have this in place before you retire. For many long-tenured employees, part of that system is turning Costco stock into a retirement paycheck.

You likely have assets spread across multiple types of accounts: 401(k), taxable, and Roth. How you pull money from these accounts matters too, because it affects how much you pay in taxes.

For many Costco professionals, this is as simple as rolling over your T. Rowe Price 401(k) to an IRA and setting up a monthly deposit to your bank account. Before you do, there are a few key things to understand and consider, including whether the NUA strategy below applies to your Costco stock. Rolling those shares into an IRA gives up that option permanently.

Expenses

This goes hand in hand with your retirement income plan, and it helps frame your retirement plan in general.

Retirement expenses often look different from working years. Many retirees spend more in the early years on travel and leisure, then see expenses level out, and later face rising healthcare costs. An easy way to estimate expenses is to use 70–80% of your pre-retirement income. This works as a starting point, but it is a very rough estimate.

It's also important to understand your net monthly need. A $10,000 withdrawal from an IRA or 401(k) does not mean $10,000 lands in your bank account, because taxes are withheld. If your monthly expenses are $8,000 and about 20% of each withdrawal goes to taxes, a $10,000 withdrawal works out exactly right: $10,000 minus $2,000 in taxes leaves $8,000.

Investing in retirement

Your approach to investing in retirement is different from your accumulation years. You are now withdrawing income, which makes you more sensitive to market swings. Having an investment allocation that you're comfortable with and that suits your retirement goals is mission critical.

Most people entering retirement have a heavy weighting toward stocks. This is a good time to re-evaluate the risk you feel comfortable taking and reduce it if needed by introducing bonds. Make sure the stock portion of your portfolio is well diversified.

Social Security: timing is everything

Social Security can be one of your most important sources of income, so planning when to claim is critical. Benefits can be claimed at 62, but delaying until 70 maximizes your monthly payout. Married couples should coordinate the timing of their claims to maximize household benefits.

Up to 85% of Social Security benefits can be taxable, depending on your income. Smart planning can minimize this.

Healthcare: the expense everyone underestimates

If you retire before age 65 and don't have continued health insurance benefits, you will need coverage for that gap: COBRA, a marketplace plan, or a spouse's plan.

• Sign up for Medicare at 65 to avoid late-enrollment penalties, unless you're still covered by qualifying employer insurance.
• Evaluate supplemental insurance options to cover gaps.
• Medicare does not cover extended nursing home or in-home care. Consider insurance or dedicated savings for these potential costs.
• Health Savings Accounts (HSAs): use pre-tax contributions to cover medical expenses in retirement. After you enroll in Medicare you can no longer contribute, but the funds continue to grow tax-free.

Tax planning: Net Unrealized Appreciation (NUA)

Many long-tenured Costco employees have access to a tax strategy that's easy to overlook: Net Unrealized Appreciation. NUA is an IRS rule that can let you pay a lower tax rate on company stock held in a retirement plan like your 401(k).

What is NUA?

NUA is the difference between what you originally paid for your Costco stock (the cost basis) and what it's worth today (the market value).

When you retire or take a full distribution from your 401(k), you have the option to move the company stock out of the 401(k) into a taxable brokerage account. Instead of paying ordinary income tax on the full value, as you would with other 401(k) investments, you only pay ordinary income tax on the stock's original cost basis. The growth, the NUA, is taxed later at long-term capital gains rates, which are usually lower.

Example: how it works

Let's say:

• You bought Costco stock inside your 401(k) over the years
• Your cost basis is $30,000
• The stock is now worth $100,000

If you use the NUA strategy:

• You pay ordinary income tax on the $30,000 when you distribute the shares
• The $70,000 of growth is taxed at long-term capital gains rates when you eventually sell the shares

This could mean a much lower tax bill compared to paying ordinary income tax on the entire $100,000.

Option 1: Take a normal 401(k) distribution

If you take the full $100,000 out of your 401(k) as cash, the entire amount is taxed as ordinary income: $100,000 × 24% = $24,000 in taxes.

Option 2: Use the NUA strategy

When you take the Costco stock out of your 401(k):

• You pay ordinary income tax on your cost basis: $30,000 × 24% = $7,200
• The remaining $70,000 of growth is not taxed yet
• Later, when you sell the shares, that $70,000 is taxed at long-term capital gains rates: $70,000 × 15% = $10,500

Total tax owed using NUA: $7,200 + $10,500 = $17,700

The difference

By using the NUA strategy, your total tax bill could be $6,300 less than if you took the normal distribution ($24,000 − $17,700). The higher your tax bracket, the bigger the difference becomes, since the strategy shifts growth from ordinary income tax rates to lower long-term capital gains rates.

This is a simplified, hypothetical example that assumes a flat 24% income tax rate and a 15% long-term capital gains rate. Your actual rates and results will differ.

When NUA makes sense for Costco employees

NUA might be a good fit if:

• You've worked at Costco for many years and built up a lot of company stock in your 401(k)
• That stock has grown significantly in value
• You don't need to sell the shares right away and can hold them for future capital gains treatment

When it might not be the best fit

• Your Costco stock hasn't appreciated much
• You'll be in a much lower tax bracket in retirement and won't benefit as much from capital gains treatment

Important rules to follow

To qualify for NUA treatment:

• The stock must be distributed in-kind, as shares rather than sold for cash
• You must take a lump-sum distribution of your 401(k) after a triggering event such as separation from service, disability, or reaching age 59½
• Your entire 401(k) balance must be distributed within one calendar year (the non-stock portion can be rolled into an IRA)

Should you use NUA for your Costco stock?

There's no one-size-fits-all answer. NUA can offer serious tax savings, but only if it fits into your broader retirement and income strategy. If you're a long-tenured Costco employee with highly appreciated stock, it's worth running the numbers.

A good advisor can help you:

• Determine the cost basis of your Costco shares
• Compare the tax outcome of NUA vs. an IRA rollover
• Decide how and when to sell the stock after distribution
• Weigh the risks of holding concentrated Costco stock in retirement

Putting the pieces together

As you can see, there are quite a few pieces of the puzzle that all need to fit together before you feel comfortable with a big jump like retirement. We like to consider ourselves puzzle masters for Costco employee retirement plans, and we can help you put everything together.

If you'd like to explore what retirement might look like for you, please feel free to schedule a complimentary intro meeting with one of our fiduciary advisors.

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This article is for informational and educational purposes only and should not be construed as tax, legal, or investment advice. The hypothetical example is for illustration only, does not represent an actual client situation, and is not a guarantee of future results. Gevers Wealth Management is independent of and is not affiliated with, endorsed by, or sponsored by Costco Wholesale Corporation or T. Rowe Price. Gevers Wealth Management, LLC is an investment adviser registered with the Securities and Exchange Commission.

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