If you’ve lost, or are leaving, a job and moving to a new one, you may be thinking about what to do with your retirement plan assets. Do you leave them where they are, or roll them over into another account? Below are several options you have — as well as points you’ll want to consider before doing anything.
Option 1: Keep your savings in your previous employer’s plan
If your previous employer’s plan allows you to keep your money in their retirement plan, that’s an option for you. After all, you’re presumably familiar with the way the plan works and will continue to have the opportunity for tax-deferred growth. However, you’ll want to consider these questions before choosing this route:
- What will you pay in fees and expenses? If you’re looking at rolling your retirement money into a different plan or account, compare the costs to what you’re paying now, because another account might be less or more expensive.
- What investment options are available with each plan? You may be comfortable with the investment options in your previous employer’s plan. However, another plan or account may offer a wider variety to enable greater diversification or may offer less expensive options, which can let your money work harder for you.
- Did you or will you take a loan? If you took a loan from your retirement plan at your previous employer, you should understand your repayment requirements before you leave or face potentially heavy tax consequences. Also, once you leave an employer, you won’t be able to take loans from your plan and withdrawals may be limited.
Option 2: Roll your savings into the new employer’s plan
If your new employer has a retirement plan and accepts rollovers, you can roll the money in your previous plan into your new one. This will allow you to continue to grow your money tax-deferred and will keep everything together, making it easier to diversify. But, before you make that move, ask the following questions:
- Can you do a direct rollover? A trustee-to-trustee rollover is the easiest, most cost-effective way to roll money from one retirement plan into another. If you must do an indirect rollover, meaning the money comes from your old plan in the form of a check payable to you, then you must deposit it into the new plan. Since the distribution made to you will be subject to mandatory tax withholding, you would need to come up with cash in the amount of the tax withholding if you want to roll over the full amount to your new plan.
- How much will you pay in fees and expenses? Compare the costs of the two plans to make sure you’re not jumping into a more expensive plan.
- What services do they provide? Consider what each plan provides in the form of advice, education, planning tools, telephone help and workshops. How is each plan helping you achieve your retirement and investing goals?
- How do their loan and withdrawal options work? Make sure you understand how to access your money before you retire, in case you need that option.
- What investment options are available? A new plan may have new options, but not necessarily better options. Make sure you have enough funds to fully diversify your investments and you’re comfortable with the amount of risk you’re taking in your overall portfolio.
Option 3: Roll the money into your own rollover IRA
You can roll retirement plan money into what’s called a rollover IRA. This will let you keep the tax-deferred status of your investment and may give you additional investment options. However, before you open a rollover IRA and start the process, ask yourself these questions:
- Have you considered the benefits of a direct rollover? A direct rollover from your retirement plan to a rollover IRA is the easiest, most cost-effective way to do a rollover because it happens between two financial institutions and you won’t pay any taxes on the money.
- What fees will you pay? This remains an item to compare no matter what path you choose to make sure you’re not going to pay more.
- What services are offered? Compare opportunities you’ll have for advice, education, planning tools, telephone help and workshops.
- Will you need to take loans or distributions? IRAs do not allow loans, so if this is something you think you’ll need, this might not be your best option. However, IRAs may have more flexible distribution options than retirement plans when you’re ready to retire — such as ways to generate lifetime income payments.
- What investment options are available? While most retirement plans have a specific number of investment options to choose from, IRAs often have nearly unlimited investment options. If a greater variety is something you’re looking for, consider the rollover IRA.
- Will you be okay with taking RMDs starting at age 72? IRAs will force you to start taking retirement income when you turn age 72, whereas retirement plans won’t until you retire if you continue working after age 72. Of course, you can always draw on these assets from an IRA earlier, but required distributions begin after age 72.
- Is it in your best interest to move your money? Understand that financial services firms offering IRAs may receive a commission as a result of your IRA rollover, so make sure it is in YOUR best interest to move your money.
Option 4: Take the cash
You also have the option to take the money from your previous retirement plan as cash and simply deposit it in a checking or savings account or spend it. This is rarely a good idea, because not only will you pay income taxes on all the money, but if you’re under age 59½, you will also pay a tax penalty. In addition, taking that money out of a retirement plan may put you behind in your retirement savings goals.
Why taking even a little cash is not a great idea
Let’s say a 50-year-old woman has been saving in a retirement plan at work. She wants to retire at age 65 and currently has $100,000 in the plan and is earning a hypothetical 4%. If she took no withdrawals and made no more contributions at age 65, she could have a lump sum of $187,298 available for retirement income. This would give her $5,350 per year from age 65 to 100, assuming the same 4% interest rate.
However, if she left her job at age 54 and took $5,350 of her money, she’d have only $178,732 at age 65, and her retirement income would be only $5,100 — or 5% less — over her lifetime. In addition, because she was under 59½ years old when she took the withdrawal, she’d have to pay a 10% penalty tax on the amount she took. Assuming a 20% income tax bracket, the withdrawal would cost her an additional $1,605 ($1,070 ordinary income tax plus $535 penalty).
Talk to your financial professional
If you’re leaving a job, consider talking to a financial professional before you make a move with your retirement assets. They can help you decide which route is the best for you right now — and for the future.
Before initiating a rollover, talk to a financial professional and tax advisor to make sure it’s in your best interest. Consider the tax consequences, if any, and ensure both accounts will allow a rollover.
This informational and educational content does not offer or constitute — and should not be relied upon — as financial, tax or legal advice. Your unique needs, goals and circumstances require and deserve the individualized attention of your own professionals, and Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates and associates do not provide tax or legal advice or services.
