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Updated on Wednesday, April 13, 2016
When you leave a job where you previously had an employer retirement plan, you have decide what to do with the money in your account.
Option 1: Leave Your Retirement Account with Your Employer
Reasons to leave your money in the current account
You don’t have to do anything: Leaving your money with your previous employer’s plan means that you take no action, so it’s easy and you can’t mess anything up.
Might have lower price point: Your 401(k) is institutionally priced, meaning it has access to institutional funds, which are usually cheaper (compared to an IRA).
Help from a financial expert: You have access to a money manager with your 401(k), which may help you if you’re inexperienced and want guidance with your investments.
Reasons why it may be best to rollover your 401(k)
Hassle of tracking multiple accounts: If you leave your money in your old plan and open a new plan with your new employer, it may become cumbersome to keep track of all your accounts. It would be easier to have all your accounts in one place.
Keep your goals in mind: If you are rebalancing your overall retirement portfolio for a certain asset allocation, it may become difficult to make sure all of the investments align and are allocated consistently with several accounts.
Risk forgetting an account: You may lose interest and forget about managing this account after you leave the company.
You might not have an option: You have to make sure this is an option because some plans won’t allow you to stay after you leave (it costs them money to administer your account). Typically, you have to have a minimum amount invested in order to remain in the plan.
Option 2: Rollover Your Account to an IRA
The perks of doing a rollover
You can directly transfer money in your old 401(k) to an IRA: This will give you control over your funds in your own personal, individual account. With a direct transfer, the funds move directly from the 401(k) to the IRA, without you touching the money. This is a great way to move your money from an old 401(k) and have control over the account and actively manage your retirement funds.
You may have access to a wider range of investment options: It’s possible your IRA may have more to offer as many 401(k)s have limited investment options compared to an IRA.
You continue to grow your retirement savings: on a tax-deferred basis (just like you were doing in your 401(k)).
IRAs have more flexible withdrawal options: You can access your funds more easily with an IRA compared to 401(k)s (not that you should). For example, you can withdraw up to $10,000 from your IRA for a first-time home purchase.
Reasons a rollover might not be right for you
You need to be proactive: You have to take action to get a rollover completed, which may be a turnoff. You have to know where you want to open an IRA, and you have to be willing to choose your investments. This may feel intimidating and may require more diligence than you’re interested in having.
Consequences of an indirect transfer: If you do an indirect transfer (as opposed to a direct transfer), you will receive a check for 80% of the funds in your account but be required to deposit 100% of the balance. This is because of a 20% withholding requirement for the employer. So, unless you have the additional 20% to make up in cash, you will be in big trouble if you take an indirect transfer.
If bankruptcy is a potential issue: Generally, there is greater protection against creditors for assets in an employer sponsored retirement account than in an IRA (this is not always the case, so read your state law). So, if bankruptcy is an issue, then an employer sponsored plan may be better.
Option 3: Rollover Your Account to a New Employer 401(k)
Reasons to rollover to a new 401(k)
Simplify your life: The benefit to moving your old 401(k) funds to a new employer 401(k) is that it keeps your investments organized and in one place. It will be easier for you to keep track of and manage with one retirement account.
Defer distributions: You may be able to defer taking required minimum distributions if you are still working at your job at age 70 ½. You don’t have the option to defer RMDs with an IRA or old 401(k) (you’re required to take them).
Reasons to keep your old 401(k) separate from your new 401(k)
You might not have a choice: This may not be an option because not all employers accept rollovers from an old plan.
New 401(k) may be limited: You may have more limited investment options with in your new 401(k) than in an IRA. If you want the most flexibility with investment options, then you may want to stick with an IRA.
Limited flexibility: There isn’t much flexibility with respect to withdrawal exceptions, which you have in an IRA.
Strategize before making your decision
Consider your long term investment strategy when making these decisions. If you have many years to save for retirement, you want to do what’s best for you in the long run.