Many of our clients have questions regarding contributions made to a retirement plan such as a 401(k) or 403(b) under a former employer. The money is yours, and there are several options to consider, each with varying advantages and disadvantages. The options below, identified from least- to most-recommended, provide an array of possibilities.
1. Cash out of your plan
Believe it or not, those retirement dollars you saved can be cashed out. Unfortunately, if you do decide to go with this option, income taxes and penalties could cost you nearly half of your before-tax savings. You also miss the potential for tax-deferred growth that employer plans and IRAs offer over a long-term period. Simply put, unless you are under great financial stress, there are more beneficial options to consider.
2. Move to your current employer’s plan
Another option is to transfer your retirement savings invested under a previous employer to your current plan. There are no tax consequences to this option but be sure to read the fine print. There may be other expenses on the available funds, withdrawal restrictions, and/or a waiting period to participate in the plan. Typically, individuals must take required minimum distributions (RMDs) from their retirement account by the age of 73. However, those who have transferred their retirement savings to their current employer’s retirement savings plan and are still working may delay RMDs until after retirement. This does not apply for individuals who are 5% owner of the company.
3. Remain in your previous employer’s plan
Continuing with your current plan is, perhaps, the simplest option since it requires no action on your part, but there are some downsides to consider. Employer plans provide limited investment options, are subject to plan fees, and prohibit you from making extra contributions. Additionally, you must adhere to the rules stated in the plan when making exchanges and withdrawing money.
4. Roll previous employer’s plan into an IRA
Rolling your money over into a traditional IRA is quite often the most beneficial route to take. The rollover is nontaxable and allows your money to continue growing tax-deferred. The IRA enables you to control fees, presents nearly unlimited investment options, and offers greater flexibility than an employer’s plan when you need to access your money. Using this option, you may consolidate multiple retirement plans from previous employers into one IRA.
Ready to Talk Through Your Options?
Please contact us if you would like to discuss your options of how to manage your retirement plan(s) from a previous employer or if you need assistance with moving a previous plan.