Getting a new job can be a very existing, yet stressful process. The less you have to think about during this time to better. This way, you can focus on meeting expectations and setting long term goals with your new company. One thing you will have to think about is what to do with a former employees retirement account. This account may be a 401(k) or 403(b) depending on what type of job you had. Here, we will detail retirement account options when changing jobs.
The worst thing you can do is just leave your old retirement account sitting untouched. Many people actually forget about old retirement savings account. While this can sometimes be beneficial to individual in some respects (out of site out of mind), leaving funds unattended can have some negative side effects.
So, here are several options you have when it comes to your retirement accounts when you change jobs.
Leave it Alone
The easiest option when it comes to dealing with an old retirement account when changing jobs is to just leave it alone. Before we dive into the drawbacks to this strategy, let’s first look at the benefits.
First, the funds will continue to grow tax deferred. Also, a 401(k) or 403(b) usually have lower fees compared to other retirement account options. There are several disadvantage to leaning your old retirement account alone when changing jobs.
If you just leave your account alone, then chances are you will miss out on rebalances. Portfolio rebalancing is where the investment allocation between securities is changed, or positions are sold/purchased to return to the set allocation. Another drawback is that you may have limited investment options. Usually, your employer will work with the retirement plan sponsor to select a handful of investments you can choose. This will mostly include several different types of mutual funds, as well as target date funds. There is definitely more flexibility from different retirement accounts outside of a 401(k).
Lastly, if you just leave your funds alone, then it probably isn’t getting monitored by an advisor. Because of that, there also may be opportunities missed without changes to your allocation every so often. While it’s important to maintain a broad allocation, there are satellite shifts an advisor can help you with to take advantage of opportunities or mitigate downside risk, while maintaining exposure to various asset classes.
Another one of the retirement account options when changing jobs is to simply cash out. If you are in a cash crunch, then you can technically withdraw the funds. This is not something we recommend unless there are extenuating circumstances.
If you decide to cash out your retirement account when you change jobs, you will lose out on all that tax deferred growth. This is a huge drawback considering how much your money will compound over time. Depending on your age, you could also incur a big withdrawal penalty. Depending on your financial situation, and if you are under a certain age, you could incur a 10% penalty for an early withdrawal.
In addition to all of this, you will have to pay both federal and state income taxes on the amount you withdraw. At the end of the day, there really are no benefits to cashing out your retirement account when changing jobs. If you absolutely need the cash, talk to an accountant or financial advisor to discuss your options. You may want to consider some ways to borrow money fast if you need it.
Roll Over to New Plan
another one of the retirement account options when changing jobs is to roll over your old account to a new one. You will only be able to do this if your new employer offers some type of retirement savings plan.
There are many benefits to this. The first one being that it helps keep things all in one place for you. In addition to this, your savings will continue to grow tax deferred. Plus, there is not tax impact on the rollover if done correctly. You may have to pay a small fee to transfer the investments to a new plan. The amount depends on the institution where it is, as well as where it is getting transferred to.
You have a couple options when rolling over to a new plan. The institution it is currently at may sell all your holdings and then just transfer the funds. Alternatively, they may do a like kind exchange, which is where they transfer the securities directly. Depending on how it is handled, expect to pay anywhere from $50-$150 for a cash transfer. A like kind exchange may cost more money, as there may be a fee for each asset transferred.
Convert Retirement Account to an IRA
An IRA is an individual retirement account. There are several different types of IRAs, including a traditional IRA and a Roth IRA. Before determine which to transfer your old retirement account into, understand the differences between a traditional and Roth IRA.
There are many benefits to rolling over your funds into an IRA. First, an IRA is usually managed by an advisor that typically offers more investment options when compared to a 401(k). They can help you pick the best investments, broaden your portfolio diversity, and reduce internal investment fees. Plus, you will be able to sleep easy at night knowing an advisor is actively watching over your account, making allocation adjustments and rebalancing when necessary. The best part is that your funds will continue to grow tax deferred (depending on the type of IRA you choose).
There are some drawbacks to converting an old retirement account to an IRA. You may have some fees associated with the transfer. In addition to this, an IRA may most more than a comparable 401(k). However, the level of service will be higher. Ultimately, you will get what you pay for.
Retirement Account Options When Changing Jobs – Summary
When it comes to the retirement account options when changing jobs, there are multiple things to consider. Making the wrong decision could have some adverse consequences, including fees, penalties, and taxes. Some of your options include leaving your account where it is, cashing out, transferring it into a new plan, or rolling it over into an IRA.
This process can be stressful – but it doesn’t have to be. Conduct your research, ask questions, and reach out to an accountant or financial advisor if you need help.