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Apr 27, 2018

4 Paths and 5 Questions To Explore When Rolling Over Retirement Plans

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After years of working for the same company surrounded by the same people (maybe even calling the same desk your home away from home), a change in employer or company structure can leave you questioning the best option deciding what to do with the dollars you have worked hard to build through your former employer’s retirement plan as you transition to your new normal.

While you may be caught up in other things, like learning the ins and outs of your new role, the clock is likely ticking on when you need to choose what to do with your retirement funds next. We’ve outlined four paths – all with their own pros and cons – to help get you started:
Leave your money where it is. You may be able to simply leave your money in your old retirement account - 401(k), 403(b), TSP or ESOP. This option is especially appealing if your old retirement plan has low fees and multiple investment options or you fall into a few other niche circumstances. Though this is a simple solution for your old funds, it might not be the best option for your unique situation.
Roll it into your new company-sponsored retirement plan. If your new employer allows for roll overs, this is a good way to consolidate the locations your retirement funds exist. This option can be inefficient if your new plan has a waiting period. You should also consider the difference in fees and investment options compared to other options you have available to you.
Cash out. You have the option to cash out your investment. If you have yet to turn 55, this likely isn’t the best option for you. Withdrawal penalties, taxes and the temptation to spend your hard-earned cash on non-essentials often makes this the least favorable option – unless you fit into one of these exceptions.
Roll it into an IRA - Take Control. Keeping your funds designated for retirement is a good idea - taking control of those retirement investments is even better. IRAs are available to everyone, offer a wide variety of investment options and often boast low to no fees. Read more about the differences between IRAs and 401ks.
Now that you know your options, it’s time to make a choice. Before you do, ask yourself these five questions:

What am I willing to pay in taxes and fees? Cashing out could mean paying $3,500 on every $10,000 you withdraw in taxes next spring. That can add up fast! Leaving your retirement account where it is (or rolling it into your new employer’s plan) could mean 1% to 2% in fees on every dollar you’ve invested. That may seem small, but when you consider the average 401K balance is nearly $100,000, those fees could cost you thousands of dollars. If you prefer keeping more of your money (who doesn’t?) an IRA may be the best option.
Will I change jobs again before I retire? Most of us will change jobs several times throughout our lives, meaning most of us also have multiple retirement accounts going largely unmonitored year after year. Under these conditions rolling your old plan to your new employer is more attractive (but not always an option.)  Another idea? Set up an IRA where you can move your money every time you change jobs. Putting it all in an IRA could also lead to the special perks or promotions that often come with transferring a large balance.
How much freedom and how many options do I want? While your immediate response to this question is probably ‘unlimited options’, there can be harm in overdoing it. (Imagine a 40-page menu at your favorite restaurant.) Fewer options can mean less stress, particularly to a novice investor, in which case an employer-sponsored plan may be the best alternative. Consider too that while some investors cash out of their plan to give themselves more investment freedom, many IRAs offer a vast array of options as well.
What is my timeline? Is there a window of time in which you need to make your decision? If so, do your research and plan accordingly. This principle also applies to your age. If you are over 55 you can often withdraw your 401k dollars without penalty. If you’re under 55 you’ll be assessed a penalty and you’ll be cutting yourself off from years of potential investment growth.
Whose advice should I take? This is one decision you don’t have to make alone. Find an impartial expert who can help you create a personalized/custom retirement plan that works for you. While the path to a happy retirement is illuminated by dozens of good financial decisions, it all starts by walking down the right one. The best advice is free of conflict of interest, pressure-free, and focused on your needs. Choose wisely!
There is no single right answer on which path is best. Different circumstances call for different choices. The good news is you’ve taken an important first step in your decision by simply identifying and understanding your options. The next step is to revisit that all-important fifth question. If you have a trusted financial advisor, rely on their expertise. And if you don’t routinely visit with a planning professional, consider starting a conversation with those that provide you with other financial services.

Updated December 2019 

Contents of this blog article are intended to provide you with a general understanding of the subject matter. However, it is not intended to provide legal, accounting, or other professional advice and should not be relied on as such. Information may have changed since the publication date.

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