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.

Disclosure

The information in this post is provided for discussion purposes only and should not be misconstrued as investment or tax advice. Under no circumstances does this information represent a recommendation to buy or sell securities. 

Pin It on Pinterest

Broker Check
Schedule Meeting