Leaving Your Job? Know Your Retirement Plan Options

When you're navigating the transition between jobs, your retirement plan might not be the first thing on your mind, but it's a crucial element of your financial wellbeing that deserves careful consideration. Whether you're moving on to greener pastures, pivoting to a new career path, or simply taking a break from the workforce, understanding the options available for managing your existing retirement savings is vital.

Upon changing jobs, there are five primary strategies for managing your retirement savings:

Option #1: Maintaining Your Retirement Savings with Your Previous Employer

This option allows your savings to continue growing with tax-deferred benefits. It's a viable choice if the investment options and the plan's performance have met your expectations.

Other Items to Consider:

• You can no longer make additional contributions to your previous employer’s plan.
• If the balance in the plan is between $1,000 and $7,000, many employers will automatically roll your assets into a traditional retirement account. If you have less than $1,000, many employers may just cash you out of the plan outright which will be subject to income tax and a 10% early withdrawal penalty if under age 59 ½.
• As a former employee, you may be subject to pay additional fees or expenses.

Option #2: Transferring Your Retirement Assets to Your New Employer's Plan

If your new employer's plan offers compelling investment options or lower fees, transferring your assets can be advantageous, preserving the tax-deferred status of your savings.

Other Items to Consider:

• The new plan may offer less attractive investment options, or have higher expenses, than the previous plan
• The retirement plan with the new employer may not accept any rollovers from a previous employer’s plan.
• The safest way from a tax perspective to transfer the assets is to arrange for a direct rollover so the funds transfer automatically without your intervention.
• If you do not do a direct rollover, you will receive the funds directly and if you don’t transfer the funds to the new plan within a 60-day window, the funds will be subject to current income tax and a 10% early withdrawal penalty if you’re under age 59 1/2. Additionally, the former employer normally must withhold 20% of the account balance for federal income taxes which is avoided with a direct rollover.

Option #3: Rolling Over into a Traditional IRA

Opting for a traditional Individual Retirement Account (IRA) offers a broader selection of investment opportunities and the continuation of tax-deferred growth, providing flexibility for future financial decisions.

Other Items to Consider:

• Managing the assets in an IRA generally requires more direct involvement and knowledge.
• Whether you manage it on your own or have a financial advisor manage it on your behalf, you may have to pay fees or expenses that were previously covered by your former employer.
• The safest way from a tax perspective to transfer the assets is to arrange for a direct rollover so the funds transfer automatically without your intervention.
• If you do not do a direct rollover, you will receive the funds directly and if you don’t transfer the funds to the new plan within a 60-day window, the funds will be subject to current income tax and a 10% early withdrawal penalty if you’re under age 59 1/2. Additionally, the former employer normally must withhold 20% of the account balance for federal income taxes which is avoided with a direct rollover.
• If you currently have no other IRA accounts and are doing back door Roth IRAs each year, a rollover to an IRA will affect the amount of the conversion subject to current income taxes owed on each Roth IRA conversion. The value of all IRA accounts is added together, and a ratio is calculated to determine the tax-free portion of any conversion.    

Option #4: Converting to a Roth IRA

This move can offer tax-free growth and withdrawals, subject to certain conditions, and introduces a wider array of investment choices. However, a rollover from a qualified plan to a Roth IRA is treated as a taxable event; all untaxed prior contributions and earnings are subject to income tax in the year the funds are rolled over.

Other Items to Consider:

• There are no required minimum distributions from a Roth IRA during the owner’s lifetime.
• The 10% penalty for early withdrawal is waived when executing the conversion.
• Managing the assets in an IRA generally requires more direct involvement and knowledge.
• Whether you manage it on your own or have a financial advisor manage it on your behalf, you may have to pay fees or expenses that were previously covered by your former employer.
• Once retirement funds are inside a Roth IRA, they may not be transferred to a traditional IRA or to other employer retirement plans.
• Factors favoring conversion of qualified plan assets to a Roth IRA include: a relatively small amount of money to be transferred; a longer period of time between now and retirement (time for additional growth, to make up for the taxes paid now); having enough cash available to pay the tax bill; and the account owner anticipates being in a higher tax bracket in retirement.
• Factors not favoring conversion to a Roth IRA include: retirement begins soon; high dollar amounts to be converted (and a higher tax burden); little or no cash to pay the current taxes; and the account owner anticipates being in a lower marginal tax bracket after retirement.

Option # 5: Choosing to Cash Out

Accessing your funds immediately offers liquidity but comes with immediate tax implications and potential penalties, particularly affecting your long-term retirement planning negatively.

Other Items to Consider:

• The cash out distribution ends the tax deferral of any untaxed contributions and earnings; these amounts become taxable in the year they are distributed from the employer plan.
• There may be a 10% early withdrawal penalty if you’re under age 59 ½ when the funds are distributed.
• The former employer is required to withhold 20% of the account balance for federal income taxes and may also be withheld for state or local taxes.

According to the U.S. Bureau of Labor Statistics, younger baby-boomers held an average of 12.7 jobs between the ages of 18 to 56, which means that it is highly likely that at some point you will be faced with the same question – “What should I do with my existing retirement assets?”.

Each of these options carries its own set of advantages, limitations, and tax implications, making it essential to carefully consider your financial goals, current circumstances, and the specific features of each plan before making a decision. Making an informed decision can significantly impact your financial security in the future, and we're here to help educate you on your options to ensure that your transition is as smooth and beneficial as possible.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from Advisys and data believed to be reliable, but no representation is being made as to its accuracy and completeness.

The information in this material is not intended as tax or legal advice. Approval #546430

This post was originally published in December 2019 and has been updated for accuracy in January 2024.