According to the U.S. Bureau of Labor Statistics, it is estimated that Americans will change jobs around 11 times between the ages of 18 and 42. A lot of these job changes will create a financial decision to be made with the retirement plan at the former employer. What should you do with the old company retirement plan?
There are four main options to choose from. Leave the account behind, roll into the new company plan, cash out or a trustee to trustee transfer.
The first option is to leave the retirement account. Depending on the plan rules, as well as the size of the account, this may or may not be an option. Typically the larger the account is, the more likely an employee can leave it in the plan.
There are several key points to consider when thinking about leaving an old plan behind. The first is investment options. With company retirement plans you will have a limited menu of investments to choose from, usually much more limited than your options outside of the plan. The other main consideration is costs. With retirement plans, there are typically administrative and accounting costs, money management costs and compensation to the representatives of the plan. These costs are “baked into” the retirement plan, and even though you cannot see them on your statement, they are there.
The second option is to roll the old company plan into the new company plan, assuming the new plan will accept the old plan’s assets. This option has similar considerations to leaving your old plan behind. There will be limited investment options and similar associated costs.
The third option is to cash out your old company’s retirement plan. This could come with steep tax consequences however. This distribution will add to your taxable income for the year. Not only will you be paying tax at ordinary income tax rates but you may also have a 10% penalty (assuming you are under 59 ½ years of age and not eligible for a hardship withdrawal). If you took a new job with higher pay, this distribution, combined with your bigger paycheck, could push you into a new tax bracket. If you simply need the cash, this should be one of the last places an individual will look to.
The last option is a ‘Trustee to Trustee Transfer’ into a new or existing Individual Retirement Account (IRA). Most will refer to this as a ‘direct rollover,’ however there is a little more to it. The ‘Trustee to Trustee Transfer’ will send a distribution from an old retirement plan directly into an IRA so that it is not a taxable event. You may accomplish several of these types of transfers in the same year, which may not be possible with other types of rollovers.
There are many benefits to opening an IRA and consolidating retirement assets. Consolidation will allow you to manage investments in one account, which makes money management much easier and simpler. If you have multiple retirement accounts, it can be very difficult and time consuming to implement a single, well thought out, investment strategy among the various accounts and institutions.
You can always take your IRA with you, whether you work for two companies in your career or twenty. You can treat your IRA as a bucket to pour in your past and future company retirement plans. Another main benefit to IRAs is that you have many more investment options available to you. It could be thousands of investment options, depending on which Investment Company houses your IRA. An Investment Advisor should be able to help you set up the IRA, transfer the assets and pick an appropriate portfolio for you. Whether you decide to contact a professional, or do it yourself, you should coordinate your retirement accounts with the rest of your financial plan.
If you currently have a loan against your retirement plan, or are considering one in the future, keep in mind that IRAs do not have the ability to borrow against the value of the account.
Unfortunately, many individuals will leave accounts at their old employers because they don’t understand their options. I have seen plenty of clients with scattered retirement accounts, which leads to a confused plan. If you are interested in what your options are and want help with making a decision, you should contact a well qualified Financial Professional. Making a mistake when transferring retirement assets can be time consuming and costly.
Joseph Conroy, CFP® welcomes the opportunity to help many more Baltimore residents with their retirement plan rollover options. Joe can be contacted at <http://www.privatedaddy.com?q=blcIRHV6HlRiEG9BSCw1GBNJRTBG_19>.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments(s) may be appropriate for you, consult your financial advisor prior to investing. Securities offered through LPL Financial, Member FINRA/SIPC.