When you change jobs or retire, should you leave your employer retirement plan where it is, or take it with you? Should you roll the money over into an IRA or into your new employer’s retirement plan (if available)?
What I have found is that some individuals are quick to act, but have regrets. Others are slow to make a change (or may not make a change at all) and find themselves with multiple accounts, in multiple places, and feel somewhat scattered. There are many reasons for the aforementioned actions, or lack thereof, but at the end of the day, you want to make sure you are making an informed decision that is best for you and your situation.
Let’s start by reviewing the four, most common options that you have when you separate service:
Option 1: Take the money and run (full distribution)
Option 2: Leave the funds where they are (assuming you are not required to take your money out)
Option 3: Transfer the funds to your new employer 401(k) plan (if available and the plan accepts rollover contributions)
Option 4: Transfer the funds to an Individual Retirement Account (IRA)
Although tempting, it is typically not an advisable option to take the money and run (Option 1). By withdrawing your funds in a lump sum, not only do you significantly reduce your retirement savings, but also the distribution is typically fully taxable and may be subject to the 10 percent premature distribution penalty. Also, keep in mind that one of the greatest advantages of an employer retirement plan is that it allows you to save for retirement on a tax-deferred (or in some cases with Roth accounts, potentially tax-free) basis. Therefore, you will want to keep the monies invested in a tax-deferred account like your 401(k) or IRA for as long as possible.
Keeping the monies in an employer retirement plan, whether old or new employer, or transferring to an IRA depends on your comfort level and your understanding of the pros and cons of doing so. If done correctly, the movement of monies from/to these types of accounts is a non-taxable event. So which option is best? Is it better to leave your funds in an employer plan (old or new), or roll over money into an IRA?
Each has their advantages and disadvantages. For starters, you will want to compare services, investment options and fees for each. You will want to review considerations that are specific to your financial situation as well. This process typically involves answering questions like these:
– Do you want ongoing professional advice, or are you comfortable managing the monies on your own?
– Are you happy with your current retirement plan investment options, or would you like a wider range of options?
– Do you plan on needing monies from this particular account? If so, are you under age 59½ and therefore need to worry about the 10 percent penalty. Or, maybe you qualify for an exception?
– Does the account include highly appreciated stock and/or Roth monies?
The list goes on…
Walking through this process prior to taking action allows you to make an informed decision – one that you feel good about and essentially guarantees all your i’s are dotted and your t’s are crossed.
If you would like to learn more or need help with a decision, call me directly at (412) 633-1695, or email me at Joseph.Yezovich@hefren.com.