One employee benefit companies often use to attract and retain talent in the workforce is access to a retirement plan, such as a 401(k), 403(b), or SIMPLE IRA plan. These types of plans allow you to make pre-tax contributions, which not only lower your taxable income for the year but also grow tax-deferred until you take withdrawals from the account during retirement. On top of that, most employers also offer matching contributions up to a certain percentage, incentivizing you to put at least some of your paycheck away for retirement or else forego the effectively FREE MONEY!
According to a report released by the U.S. Department of Labor’s Bureau of Labor Statistics in August 2017, “Individuals born in the latter years of the baby boom (1957-1964) held an average of 11.9 jobs from age 18 to age 50, the U.S. Bureau of Labor Statistics reported today. Nearly half of these jobs were held from ages 18 to 24.” Thus, while the reasons for changing jobs can be numerous (higher pay, relocation, career change, etc.), chances are you could find yourself with multiple retirement accounts all held at different financial institutions, and keeping track of them all may become a burden. So, what are your options?
1. Leave the Plan(s) in Place
You can essentially “do nothing” and leave the plans exactly where they are. However, as you might imagine, keeping track of the investment options, fees, rebalancing, and recordkeeping can get more complicated and time-consuming with each additional account. This may also lead you to forget about or stop paying attention to the plan(s). Additionally, many plans will automatically close your account and send you a check (less tax withholding) if it does not meet their minimum account balance requirements (e.g. account does not have a market value of at least $5,000), effectively increasing your taxable income for the year. Administrative costs may be charged to your account as well just for staying in the plan, despite you no longer working for the company. Finally, as with most employer-sponsored retirement plans, your investment choices will continue to be limited to what is available within the plan, and you will no longer be allowed to contribute to the account.
2. Liquidate the Account Into Cash
While many plan accounts are automatically closed if they do not meet minimum balance requirements, you have the option to liquidate each account yourself, no matter what the balance is, as long as you are no longer employed by the company sponsoring the plan. This may seem like an attractive option, especially if you were unexpectedly laid off, but there are a couple of considerations to make:
- Taxes & Penalties: Because these plans are funded with pre-tax dollars (with the exception of Roth contributions, if allowed in your plans), every dollar you take out of the plan will be added to your taxable income for the year, increasing your tax bill and potentially putting you into a higher marginal tax bracket. Additionally, if you have not yet reached age 59 ½, you will also pay a 10% early distribution penalty to the IRS.
- Tax-Deferred Growth: The main benefit of any retirement account funded with pre-tax dollars is those contributions lower your taxable income and can grow tax-deferred. In theory, and in most real-life cases, this allows you to avoid putting this money on your tax return now in favor of growing the account and putting it on your income during retirement, when you are likely in a lower marginal tax bracket.
3. Rollover the Plan(s) Into Your New Employer’s Plan
Many employer-sponsored retirement plans allow you to rollover previous employer plans into their plan. This is a very common choice, as it consolidates your retirement accounts into one financial institution and avoids any potential taxes and penalties associated with cashing out the plan. However, you should be aware that this move cannot be undone once completed. You will also be limited to the investment options offered in the new employer’s plan, which are typically restricted to a menu of mutual fund options, which can have relatively high internal expense ratios and are not managed according to your unique financial situation.
4. Open a Rollover IRA
Your final—and, typically, your most advantageous—option is to open and fund a Rollover IRA. This gives you the most flexibility, as you can have the account held at a wide range of custodians (Pershing, Fidelity, Charles Schwab, etc.) and have access to thousands of investment options, as opposed to the limited choices within the employer-sponsored plan. You can also have the money managed according to your specific needs and goals by selecting a financial advisor who knows your situation and can customize your portfolio accordingly. Many advisors, including us here at B&C Financial Advisors, also provide financial planning services not typically offered by employer-sponsored retirement plan providers.
If you have old retirement plans from previous employment and are not sure what to do with them, we would be happy to discuss these options with you to determine what makes the most sense for your situation.
The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.