4 Retirement Account Options After a Job Change

According to The Balance Careers, today's average person changes jobs ten to fifteen times (with an average of 12 job changes) during their career.  While many factors go into changing jobs, one critical factor that people should decide on in conjunction with a job change is what to do with their employer-sponsored retirement plan or, in most cases, a 401(k) or 403(b).

There are four potential options that one could consider how to handle the care and treatment of your retirement plan;

1. Take your money out in a lump sum payout,
2. Leave assets in the old employer plan,
3. Rollover assets from the old Company to a new company retirement plan, or
4. Rollover assets into one of three IRA options.

The decision tree below is a great visual for the details we will focus on.  The tree is color-coded in that red boxes are bad results, orange may be good or bad, and green boxes are great attributes.

Taking your money out in a lump sum

This first option is the one option that I would not recommend to anyone unless you have a financial emergency and have no other possible sources of funds to cover a catastrophic event.  These are undoubtedly difficult situations, but I would not touch these assets until you have exhausted every viable option.  If you decide to take money out, you will be subject to a 10% early withdrawal penalty unless you are older than 59 ½ and will be taxed at your ordinary-income rate.  A few exceptions apply to the early withdrawal penalty, but the taxes are unavoidable.

Leave your asset in your old employer's plan

I don't recommend this option either for the following reasons;

1. Your assets are, in essence, locked up.  You can no longer contribute to the plan and can no longer access your money through a potential loan option if your plan even offers a loan option.
2. Increase in fees.  Some plans won't allow you to keep assets in a plan if you are no longer employed by the plan sponsor (old Company).  If they allow your assets to remain in the plan, it could be for a limited amount of time, and they could start charging you maintenance fees to keep the account open.
3. You have limited investment options.  Your investable options will always be limited to whatever options your company plan allows for in the plan.  Most plans only offer a limited lineup of mutual funds that can carry high expense fees while underperforming their respective benchmarks — a double negative.

Rollover assets from the old Company to a new company retirement plan

Nowadays, it is highly unusual for a medium or large company not to have an employer-sponsored retirement plan; smaller companies may not have a retirement plan option.  In this situation, rolling over assets from the old plan is not an option.

But what if it is an option?  Is it a good option?  Below are some points to consider.

• There are no penalties or taxes for rolling over assets from one qualified retirement plan to another when you change jobs.
• You may still be faced with limited investment options.  Just like leaving your assets in your old plan, you are still limited to whatever options your company plan allows for in the plan, and those could be better or worse than your previous plan.
• If your new Company offers a loan option as part of their retirement plan, then you would have access to your assets via a loan if you were to roll those assets over.  Be careful, as most plans typically have a waiting period before you can even access a loan.

Rollover assets into one of three IRA options

I recommend this option to most people for the following reasons;

1. It provides the most investable options.  Within an IRA, you can invest in individual stocks, bonds, and ETFs vs. only mutual funds, which are typically what most employer-sponsored plans offer.  This allows you to create a diversified portfolio, usually at a lower cost.
2. Lower costs.  Depending upon your old Company's investment plan lineup, the investable options (again typically mutual funds) charge fees, and in some cases, those fees can be very high, between 1% and 2%.  
3. No penalties or taxes for rolling over assets.  Like rolling your assets over from an old plan to a new plan, there are no penalties or taxes for rolling over assets from one qualified retirement plan to an IRA when you change jobs.

If you choose to roll your assets over to an IRA, there are three IRA options that you will need to choose from.

1. Traditional IRA.  If your previous plan had all pre-tax contributions, which means you have not paid tax on those assets, you would then roll those assets into a Traditional IRA.
2. Roth IRA.  Some plans now offer the option for an after-tax contribution, such as a Roth, or a plan may allow you to make pre- and after-tax contributions.  Whatever the case, you must align your contribution to the correct IRA option to avoid paying unnecessary penalties and taxes.
3. SEP.  For those of you who may be striking it out on your own, A SEP IRA is an option for small businesses to make pre-tax contributions to owners and their employees.  Pre-tax contributions from another qualified plan can be rolled over into a SEP.  Deciding if a SEP is the right option for your business is another topic, but I wanted to make people aware that this is an option.

The Best Decision

What to do with your assets is a critical factor during a job change, often overlooked.  However, missing the opportunity to transfer your assets most efficiently into the most effective savings option could harm your wealth management plan.  Determining the best option for you should go hand in hand with the decision to change jobs.

Having been through multiple career changes before founding TAMMA, I can understand and empathize with you on how overwhelming these choices can be.  We can help you follow through on your best option to support your family's wealth management plan.

Take the first step in discovering how to plan for the lifestyle you want and the peace of mind you seek by scheduling a free alignment meeting.