Were you contributing to an employer sponsored retirement plan such as a 401(k) or 403(b) before you decided to leave an employer and start a new job? Most people pack up their desks when they leave but many forget to take the most important thing with them, their retirement account!
When you have been contributing to a retirement plan offered through your employer and make the choice to leave that job, there are several options available to you for your retirement savings.
Roll over your 401(k) to your new employer’s plan
This is generally the best option as long as your new employer’s plan allows it, it has good investment options, and it has relatively low fees. By consolidating your retirement savings, it is much easier to build a cohesive investment portfolio.
Open a Rollover IRA
Many people are unaware that they are able to rollover their previous 401(k) into their new plan. Instead, they opt for rolling their previous 401(k) into a new IRA, called a Rollover IRA, often at the urging of their 401(k) company. In many cases this can be a good option but there are a few pros and cons:
Pros
· More investment options which means more control over your investments
· Lower fees
Cons
· Reduces your future ability to contribute to a back-door Roth IRA due to the pro-rata rule
· It may not provide the same protections from a lawsuit or bankruptcy that your 401(k) offers - do not commingle 401(k) rollover funds with contributory IRA accounts to continue creditor protection
· If you are planning to contribute to the 401(k) at your new job, keeping track of two accounts may be a daunting task
Leave it with your previous employer
In some cases, this could be an advantageous option if your new 401(k) does not offer a wide variety of investment options or charges higher fees. Not all companies allow this option; some will automatically roll the old account into a new Rollover IRA or distribute the funds to you. Leaving your retirement account with your previous employer is typically not the best option as you are no longer able to contribute to it, which leaves you with two accounts to monitor and often times it is neglected.
It is important to note that rolling over a 401(k) is not the same as withdrawing the balance of that account and verbiage becomes very important when dealing with retirement accounts. Any withdrawals from an IRA or 401(k) before you turn 59½ will incur a 10% early withdrawal penalty; with one exception, if you retire and you are at least 55 you can withdraw funds from your 401(k) - NOT an IRA - and avoid the penalty. When you speak to your 401(k) provider, you should request a “direct rollover” to your new account. A financial planner can help you decide which option is best for you.