If you’re like most Americans, you’ve changed employers a few times throughout your working career. In fact, the average person switches jobs 12 times during his or her lifetime!
While job-hopping can get you a variety of experience, it can also create some complexity managing your finances – specifically when it comes to the money you’ve saved in employer-sponsored retirement plans such as a 401(k) or profit-sharing plan.
Every time you leave a job where you contributed money to an employer-sponsored retirement plan, you are faced with the dilemma of determining how to handle those old plans. Naturally, each time you must ask yourself: what should I do with this account?
Generally, you have four options.
1. Leave it be.
Your first option may be straightforward – simply leave the account invested in your former employer’s retirement plan.
Some employers may allow you to keep your retirement savings invested in their plan after you change jobs or retire. That allows your savings to retain tax-advantaged growth potential until you withdraw it.
Additionally, if your former employer has a plan that provides access to low-cost “institutional” funds, you may be able to continue investing in those funds. Generally, they are less expensive than the funds available in a typical individual retirement account. Those two reasons alone can justify leaving your account invested in your former employer’s plan.
However, managing more than one employer-sponsored retirement plan can become difficult over time.
For example, it may prove challenging to keep track of individual account statements from each employer-sponsored plan and effectively manage your investments if they are spread across different accounts.
Additionally, even though you may be able to leave your account invested in your former employer’s plan, you are bound by the plan’s rules and restrictions on investments as well as any extra restrictions for former employees.
2. Transfer your assets to your new employer’s plan.
If your new employer provides you with access to a retirement plan, then you may be able to transfer your retirement assets into your new employer’s plan. Having your retirement plan accounts in one location may make them easier to manage and allow you to maintain the tax-deferred status.
There are a few things to consider when evaluating this option.
First, ask your new employer whether their plan allows you to transfer your retirement assets from your former employer’s plan and if there is a waiting period before enrollment in the new retirement plan is allowed.
Second, review the new plan’s investment options and determine whether they are better than your previous plan. It is important to keep your money where it has the best growth potential.
Third, determine when you can access your savings in the new employer’s plan without incurring penalties.
3. Take a lump-sum distribution.
Taking a lump-sum distribution means you have immediate access to your savings, allowing you to use that money however you wish.
However, depending on your age, this option can be costly because you may incur early withdrawal penalties and taxes may be levied by the IRS. Specifically, significant tax consequences and penalties may apply if you withdraw the funds before age 59½.
As with any financial decision, make sure you understand the tax implications before cashing out of your employer-sponsored retirement plan.
4. Rollover your assets into an Individual Retirement Account (IRA).
A rollover transfers your retirement assets held in an employer-sponsored retirement plan directly into a traditional IRA or a Roth IRA. Where the funds land between the two depends upon which option you are eligible for and which is allowed based upon tax rules.
Keep in mind, you are likely to pay more in fees and expenses if you roll over your assets to an IRA than you may pay in an employer-sponsored plan.
Additionally, if you hold company stock, Net Unrealized Appreciation (NUA) allows only the cost basis of the company shares to be subject to tax at the time of distribution and the difference to be taxed when the stock is sold. In this case, the favorable tax treatment of NUA is lost if the shares are rolled into an IRA.
Along with keeping your money in a tax-advantaged plan, you may have broader investment options compared to what was originally available in your employer-sponsored plan. Having more options to choose from gives you the ability to maximize your retirement contributions to those plans.
Online investment advisory programs like BluVest, available through HD Vest Advisory Services®, can provide account management, professional portfolio allocation and modeling that is best suited for your situation. With low account minimums and low fees, the BluVest Program provides tailored investment opportunities that allow you to easily save for your future.
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