Have you recently changed jobs? Did you contribute to your former employer’s retirement plan (401k, 403b, etc.)? If you answered the last two questions in the affirmative, you will have to decide what to do with your workplace retirement savings.
The following is an introductory guide of your options. Please note that this post does not cover every factor you must consider before making a decision. Instead, I focus on the biggest factors that affect average investors.
Option 1: Roll over your 401(k) to an IRA
Pros
More Investment Options
Depending on where you open an IRA, you may have a larger selection of investment options compared to a workplace retirement plan. Therefore, you may achieve better diversification.
Investment Consolidation
Consolidating workplace retirement plans into one IRA allows for easier management.
Financial Advisor (If Applicable)
If you open an IRA with a financial advisor, you may get advice on how to invest your retirement assets. This could be helpful for financial planning purposes.
Distributions Possible During Financial Hardships
Early distributions from retirement plans (before 59 1/2) may be subject to penalties. Early distribution options from workplace retirement plans tend to be more restrictive than individual retirement accounts. Note, workplace retirement plan rules vary.
Additional Contributions (If Applicable)
If you contribute to a workplace retirement plan, you may be able to contribute to an IRA as well. You can see the IRA contribution limits on the IRS website.
Cons
Potential Higher Cost
Depending on the circumstance, this option may be more expensive than keeping your retirement plan at your former employer. For example, working with a financial advisor is an additional cost. Also, certain investment options may be more expensive than the investments within your workplace retirement plan.
Requires Effort to Complete Rollover
You may have to complete multiple steps to complete a rollover. Some companies only require a phone call and others require notarized paperwork. Depending on the requirements, this process may take time.
Required Minimum Distribution (RMD)
Per the IRS, most tax-deferred accounts (401k, IRA, etc.) require that you withdraw a certain percentage of your retirement assets after you turn 70 1/2. For example, if your investments are in a Traditional IRA, SEP IRA, or Simple IRA, you must take a distribution. This will be a taxable event.
Option 2: Keep your 401(k) at your former employer
Pros
Requires No Initial Effort
Keeping your workplace retirement plan at your former employer requires no initial effort on your part.
Potential Lower Cost
Assuming you work with a financial advisor, employer-sponsored retirement plans usually have lower fees.
Delay Required Minimum Distribution
If you are still working beyond age 70 1/2, RMDs may be deferred if your workplace sponsored plan allows and if you are not a 5% or more owner of the company.
Cons
Fewer Investment Options
By design, workplace retirement plans usually have fewer investment options than self directed IRA accounts. Depending on your investment goals, this may be an issue.
Requires Effort to Manage Investments
Having your retirement accounts at multiple employers requires more effort to manage. If you leave your workplace plan at your former employer every time you switch jobs, managing your investments may become very difficult.
Option 3: Roll over your 401(k) to your new employer
Pros
Investment Consolidation
You can achieve investment consolidation if you rollover your workplace retirement savings from one plan to another as you switch jobs.
Requires Effort to Complete Rollover
See above.
Potential Lower Cost
See above.
Cons
Fewer Investment Options
See above.
Delay Required Minimum Distribution
See above.
Plan Restrictions
Some employer plans do not allow you to rollover from your former employer. Also, there may be a waiting period after your employment starts before you can enroll in your new employer’s plan.
Bottom Line
Deciding how to manage your retirement savings is very important. It is evident that you must consider many factors before deciding to roll it over into an IRA.
For simplicity reasons, this post only scratches the surface. There may be other tax and legal reasons why you should consider each option. Before making a decision, please consult with your financial advisor, accountant, or employer’s plan administrator to learn about your options.
The Financial Industry Regulatory Authority (FINRA) published information about the rollover process. It may be helpful to review their article.
