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What to do with old retirement accounts?

July 09, 2019

What happens to your old retirement accounts when you change jobs or retire?  There are 4 options a person should be aware of when considering what to do with the old account.  Once you leave your job that was sponsoring the retirement program, the individual will lose the opportunity to contribute money into that account via paycheck.  No longer being able to make contributions to the account may warrant one of the four options.  

1. Leave the money in the plan.  An employee can leave their money in the old employer's plan.  The biggest draw back to leaving the money with the old plan is there is no longer the ability to make contributions into the account.  Another drawback to leaving the money in the plan is that the old plan may offer a limited number of investment choices.  An individual may find a greater variety of investment choices outside of an employer sponsored retirement plan. The cost of the investment options may be cheaper outside of the plan as well.  Leaving the money in the former employer plan will still give the individual the opportunity to grow their money, but with no future contributions available.

2.  The absolute worst of the 4 options is to close the account.  If a person has an old 401(k) or 403(b),  separating from employment will give that person the option on how to move forward with the account.  A person with a $25,000 account, that elects to close the account and take the distribution out as cash, could now add an additional $25,000 to their taxable income for the year.  If that person is under age 59 1/2 they will also pay a 10% early distribution penalty in addition to the taxes that are now due on that distribution.  The lump sum of $25,000 may push the individual into a higher tax bracket for the year.  When money is taken out of a retirement account, taxes are usually due at that point.  If that person is subject to the 10% penalty, a person that should have been paying 12% in taxes may now be paying 22% due to the penalty, and if the income from the distribution is great enough, that person may be pushed into an even higher tax bracket.  This is the least efficient way to take a distribution from a retirement account.  

3.  Move the money into a new work plan.  If you are a person that is just changing jobs, you may be able to move your money from your old employer's retirement plan, into your new employers plan.  Not all retirement plans accept money from other retirement plans.  It is always a good idea to check and see if this opportunity is available with the new retirement plan.  If the opportunity is available, consolidating the plans maybe beneficial.  It will simplify keeping track of your investment accounts.

4.  The most likely scenario is a person rolling the money into a Traditional IRA.  Many retirees reach a point where they feel it is important to consolidate old retirement plans into one account.  This simplifies managing a persons investments, because all of the money has been consolidated into one account.  the traditional IRA is a pre-tax vehicle, so by consolidating retirement accounts into a traditional IRA, the tax deferral remains in place and prevents any tax implications until the money is distributed from the account.  An individual may find this option to be the best fit for them since they will get to choose what investments they will utilize.  Usually a person will find a greater number of investment options outside of an employer sponsored than in the plan.  Costs and expenses could potentially be more favorable outside of the plan as well. 

Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of FINRA website for additional information.

This blog post is just a quick summary of the options available to a person once they are eligible to remove their money from a retirement plan. There are numerous factors to consider before making the decision on how to proceed.  By consulting a financial professional, an individual will be much better informed about the opportunities that may be available to them, and can feel more comfortable with the decision they make.