We live in a time where staying at one company and becoming a “lifer” is unheard of. Heck, we’re in an era where it isn’t unheard of to completely change careers. Whether it be due to a promotion, relocating, your position being eliminated, or some other reason; the average person will hold 12 to 15 jobs in their lifetime.
When you change jobs, more specifically companies, you also are leaving that company’s retirement plan. If you were enrolled in that employer sponsored retirement plan, what do you do with that money you can no longer add to? Maybe you’re being forced out of the plan, and have to liquidate or roll it over. What should you do?
Reasons to Leave it
Sometimes plans force you out after your date of termination. Whether that be due to minimum account balances of inactive employees or the fact that a plan doesn’t want to administer the account of inactive employees. If they don’t force you out, then you do have the option to leave the plan. I don’t really see much of a reason to leave the funds if you’re early on in your career and wealth building phases.
If you have a substantial balance, you’re partial to the employer’s plan; by all means, stay in it. But only stay if they offer an excellent product selection at a low cost.
Reasons to Move It
- Consolidation: especially early on in your wealth building, you don’t need to have multiple 401(k)s. It’ll get overwhelming trying to keep track of everything and it’s easier to take care of it right away.
- Greater Control and Flexibility: when you’re terminated from a plan, you lose the ability to add to the funds and change your product selection. You also have greater investment selection outside of an employer plan.
- High fees: administrators charge fees that cover the cost of running your retirement plan. There are also underlying fees within mutual funds.
- Lack of advice: When you leave those funds in limbo, no one is working in your best interest to make sure you have the appropriate product selection for your risk tolerance.
Where to Move it
- Move it to your current employer’s retirement plan
If your current employer offers a retirement plan, contact the administrator and see if they allow for rollovers from old qualified retirement plans. If they say yes, it’s typically a form you need to fill out and send in to initiate the process. Simple as that. This may make the most sense for someone with a smaller retirement account balance and is looking for consolidation.
- Roll it over into a Traditional IRA
If your current employer doesn’t offer a retirement plan, or you’re looking for greater control over the investment choices, consider rolling over your 401(k) or 403(b) into a Traditional IRA. This will allow you a way to continue to keep contributing to your retirement savings, while providing greater control and flexibility of the account.
If you choose to do this through an advisor, we can provide you with a wide selection of investment choices than what might be available within an employer sponsored plan. This allows the investor to have greater selection choice that fits within their risk tolerance while working with someone who has their best interests in mind.
What not to do:
Please do not cash it out, please. No matter what the dollar amount is. First of all, if you’re under age 59 ½ you’re subject to the early withdrawal penalty. At the federal level, this is 10% of the total withdrawn amount. In addition to that, some states will assess a penalty as well. For example, the Wisconsin Department of Revenue asses a 33.3% of the 1% federal penalty (or 13.33% total penalty).
Second, if you cash it out you’re losing the growth potential and time that you had to your advantage. Time value of money! If you’re forced to start over, you have less time to save. Read about why this is bad here.
With the average person changing jobs an average of 12 times, chances are you’ll have at least one or two different employer sponsored plans in your lifetime. What are you going to do with those funds when you’re forced to make a decision?
Carolyn Rowland is a CERTIFIED FINANCIAL PLANNER™ passionate about empowering individuals to take control of their financial landscape. “We often tend to place our own priorities on the back burner for others, resulting in sacrifices we don’t often realize we’re making.”Carolyn believes in taking a values-based approach to financial planning. “Together we’ll define what matters most to you, what you want your life to look like, and develop a plan that fits your lifestyle.”
Carolyn Rowland is in the Milwaukee WI, area.