Leaving your job can be chaotic, whether you’re retired, laid off, or moving to a new company. Although taking care of your previous employer-sponsored retirement plan may not cross your mind, it is crucial to consider addressing it during your transition.
You have four options for your retirement assets, which will be outlined shortly. As with most financial decisions, each choice has pros and cons, and your specific circumstances may make one choice more appealing than the others. If you are still determining which option would be in your best interest, consider speaking with a financial planner or advisor.
Leave Assets in Your Former Employer’s Plan
You can leave your investments where they are when you leave your job, though you will not be eligible to continue contributing. This is the default option if you choose to do nothing. However, if simplifying your retirement savings is your goal, there may be a different route for you. If you leave your investments behind at each company, you’ll have various accounts to track throughout your career and distributions to take from each during retirement. Keeping in touch with former employers can be difficult.
Rollover into the New Employer’s Plan
A rollover moves assets from one account to another while avoiding taxes and penalties. You can seamlessly move your assets from your old employer’s plan to your new one without losing money. This option is advantageous because your assets will grow in a tax-advantaged account, and you won’t have to start over at each new company. If your new company has a better selection of investments or lower prices than your previous employer, it makes more sense to do a rollover.
Rollover into an IRA
An IRA will offer you the most versatility and flexibility, so an IRA may be a better bet if you’re unhappy with your former or current employer’s plans. An IRA can also be more convenient because you won’t have to worry about rolling it over again if you leave your job. One feature unique to IRAs is the ability to take penalty-free distributions early (before 59 ½) to pay for your first home or qualified higher education expenses. You’ll still pay income tax on the distributions, but you’ll avoid the fees you would typically accrue if you cashed out of an employer plan.
Cash out the account
This option is least likely recommended but can be useful in certain circumstances. It’s important to know that cashing out a retirement plan incurs a 20 percent tax and a 10 percent penalty for early withdrawal, so you won’t get the amount listed in your account. If you’re truly strapped for cash or over age 55 when you leave your employer (thus avoiding the early withdrawal penalty), you may want to consider cashing out. However, cashing out is generally not advisable. In addition to the taxes and penalties, your money will lose its tax-advantaged growth, and you may be damaging your future financial security. Cashing out to reinvest in a new employer plan or IRA is a costly mistake many workers make yearly.
Now that you know your options, you can decide about your retirement assets. Leaving your job for any reason can be stressful, but jeopardizing your retirement security would be much worse.
Jasper Smith is the founder of The #BuildWealth Movement®. He’s worked in the financial services industry for over 15 years and holds a life insurance license, multiple securities licenses, and the Certified Retirement Counselor (CRC®) designation.
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