How many employers have you worked for?
I’ve worked for four during my career, and throughout that time I have participated in three different employer retirement plans. There are some folks that don’t take advantage of these for one reason or another, but many of us do even if we don’t understand everything about them. We’ve been told that we need to save for retirement even though it sounds like it is so far away and that this is an easy way to do it. We can save through payroll deduction and often times the company will even match a portion of our contribution (free money!). But what happens when you leave your job, whether it’s to retire or to start a new one? What should you do?
Many people I talk with will tell me about the 401(k)s they’ve left scattered behind in their former employer plans. They left them there because they were busy with the job change and they told themselves that they would take care of it later, but later never came. Not that you’re any less busy now but maybe it’s time to consider your options, and you generally have four to choose from:
- Keep your money in your former employer’s plan.
- This option may have lower fees and your account balance continues to grow tax-deferred but one of the biggest downsides is that you’re limited to the plan’s investment options.
- Roll it over into your new employer’s plan, if permitted (obviously, this isn’t an option if you’re retiring or your new employer doesn’t offer a retirement plan).
- The pros and cons of this option are similar to leaving it in your former employer’s plan but at least your retirement assets are consolidated in one account.
- Rollover your savings to an Individual Retirement Arrangement (IRA) account.
- The fees will likely be higher than in an employer plan but this consolidates your retirement assets in one convenient place as you change jobs and provides the flexibility to select investment options that fit your specific needs while continuing any tax-deferred growth.
- Withdraw your savings directly from the plan, which will likely cause you to incur taxes and an additional IRS penalty of 10% if you are under age 59½
- This just isn’t a good option, and we would likely never recommend it no matter the situation due to the taxes you’ll pay.
Ultimately, while there are options that are generally better than others, this decision is one that should be made with consideration of all your unique circumstances. A trusted advisor can provide you with the necessary education for you to make an informed decision, walk you through the process, and help with any paperwork or phone calls that are needed.
Sometimes those old plans can be difficult to track down, especially if you haven’t kept up with them, but taking a little time now to take care of them can help you know whether your retirement plan is on track. And if you need a little more understanding of where you are on the path to financial independence, click here.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.