There are a million and one things to think about when you leave a job for a new one. New office dynamics, tasks and responsibilities, even new lunch options! There is one item that comes with leaving an old job that often gets overlooked. What to do with your previous company retirement account, your 401(k) or 403(b). You have three options: rollover your old account into an IRA account, keep your money in your previous employer’s plan or rollover the old account to your new employer’s plan.
What is one to do? The answer to this question depends on a few things! I present the pros and cons below.
Benefits of an IRA Rollover:
Your Old Plan May Be a Bad Deal – It is truly amazing how many bad plans are out there. Some plans impose atrocious expense rates, wrap charges and other needless costs.
Expand Your Investment Options – Most plans, even the good ones, restrict their participants to a few investment options. Roll your money over into an IRA and you have unlimited options.
Consolidate Your Accounts – By consolidating your old plans into a single IRA you can manage your portfolio in a single account and get complete picture of your investments all in one place. Even more importantly, by rolling out several accounts into one you can sometimes save on expenses.
Avoid the Money Market Trap – In some cases, if your former employer is unable to make contact with you and your previous investment choices in your plan are no longer available, your investments may be placed in some sort of stable principal fund. If you forget to follow up, it may be years before you realize that your hard earned retirement investment is earning 2% a year.
Tracking Your Money – Many plans do not use ticker symbols and are not easily trackable. In many cases this is true for companies whose plans are managed by an insurance company (ING, Hartford etc.) By rolling-over your plan into an IRA you will be able to invest your money in funds for which a public price is posted on a daily basis.
Benefits of Leaving Your Money in Your Old Plan:
Tax Benefits If You Hold Company Stock – This is beyond the scope of this article but if you have company stock in your company retirement plan, contact a financial advisor before initiating a rollover.
Benefits of Rolling Over Into Your New Employer’s Plan:
Ability to Borrow Penalty Free – This is a highly unadvisable strategy but it is a benefit of an employer plan versus an IRA.
Penalty Free Withdrawals at Age 55 – You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA. To do so, you must terminate your employment no earlier that the year in which you turn age 55.
The decision whether or not to rollover funds is not always cut and dry. Do your research and choose wisely! And remember, a rollover contribution doesn’t count toward annual IRA contribution limits — you can still make your regular contribution. Also, don’t forget to keep investing in your current employer’s retirement plan — at least enough to collect the full amount of your current employer’s matching contributions. Your retired self will thank you.
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