Question:  

I’m starting a new job and not sure how to manage my retirement account. What choices do I have, and what are the pros/cons of each?

Answer: 

Congratulations on your job change. You’re not alone; the U.S. Department of Labor reports that the average American worker will change careers five to seven times during their life, and approximately 30% of the workforce now changes jobs every 12 months.

Start with understanding your current retirement account. Where is it held? How is it invested? What are the rules for transfers or withdrawals? If your career move is between companies that are somehow related as in a parent-subsidiary relationship, you may not need to take any action. If that’s not the case, there are choices for you to think about.

Leave the funds where they are

The path of least resistance is to leave your account where it is. Find out if your former employer allows you to do so. If you do this, it’s crucial to remember when you retire that those funds were left behind. An estimated 24.3 million 401(k) accounts with an average balance of over $55,000 were left behind by job changers in 2021.

The dollar amount in your current retirement plan may factor into whether you can keep it with your previous employer. Some employers require a transfer if there’s less than a certain amount, or even automatically cut the employee a check for the balance. If your employer does this, you’ll want to move those funds into another retirement account ASAP, or face paying taxes and penalties. 

Rollover to a Self-Directed IRA

Changing jobs, or separation of service as it’s technically called, offers a time to simplify and roll employer plan assets into Individual Retirement accounts (IRAs) for more flexibility and control. Employer plans may also have higher fees and fewer investment choices. An IRA has more investment options, potentially lower fees, and could include the help of a financial advisor to help you simplify and organize financial affairs. 

Roll funds into a new plan

While keeping your balance with your previous employer plan can save you the trouble of a rollover, that might not always be the best choice. Due diligence is important to avoid transferring funds from a former employer account to a more restrictive one. Some accounts have rules like not allowing you to access your funds until you are 65 years old, or not until you’ve been separated from the company for a certain number of years. You don’t want it to be more difficult to access funds. If you decide to transfer your 401(k) balance to your new employer’s plan, follow the transfer rules precisely. If you don’t perform a direct rollover, you could face penalties and taxes on the transaction.

Cash out the plan

If you’re thinking about taking the money out of your plan, think it all the way through. If you don’t meet a 10% penalty exception, you’ll pay an early withdrawal penalty, plus income tax on the balance. You’ll also sacrifice the potential growth your investments could’ve seen with more time in the account.

Simplify now and at retirement 

When it comes time to retire and you have retirement accounts scattered about, it may be helpful to consolidate, streamline, and simplify. If you have a variety of employer-sponsored plans – like 401(k)s, Roth 401(k)s, 403(b)s, 457(b)s, IRAs and Roth IRAs, working with your CERTIFIED FINANCIAL PLANNER™ Professional who understands your entire financial picture to advise the most efficient order to take withdraws from the various accounts could be beneficial. This will depend on factors such as your tax bracket, account balances and other income sources. 

With most employer-sponsored retirement plans, you’ll need to withdraw a minimum amount of money each year (a “required minimum distribution,” or RMD) once you reach your Required Beginning Date. This might get a bit complicated to keep track of if you maintain multiple accounts. Familiarize yourself with each plan’s terms because each may include additional specifications for accessing your money. 

When changing jobs, consider your choices and options carefully while positioning retirement savings to do the most for you. Assess what employer-sponsored retirement accounts you have, and the amount in each. Look at each plan’s terms and determine what your options are for transferring funds. If you have questions or concerns, consult your advisor to determine how best to move forward. Stay focused, simplify, and plan accordingly.