If you are leaving your job, don’t forget to take your retirement plan with you.
These plans can be rolled over (without taxes and penalties) to another employer plan or to an IRA - if done properly. This includes a 401(k), 403(b), or governmental 457(b) plan.
Typically, there are four main options on what to do with your employer retirement savings plan. Let's take a quick look at these.
Leave the money in the plan
A lot of people do this because it is easy – you don't do anything. You account can still get tax-deferred growth (or tax-free growth in a Roth account).
A possible disadvantage is you may not get as much service or education on your plan as when you were working for the employer. Also, estate planning may become more complex for beneficiaries than with an IRA.
Employer plans generally provide greater creditor protection than IRAs, but employer plans transferred to a rollover IRA maintain that higher level of protection.
Note: Some plans may not allow you to leave your money in the plan if you have a small balance.
Roll it to an IRA
An IRA keeps your money growing tax-deferred or tax-free depending on if it is in a traditional or Roth IRA. Remember that funds from a Roth account must be rolled to a Roth IRA and funds from a pretax account can be rolled to a traditional IRA. Although you can convert pretax funds to a Roth IRA, there will be taxes!
5 Star Tip: talk to a financial planner before converting funds to a Roth IRA as this is a taxable event.
IRAs usually offer more investment choices than an employer plan. Plus you can freely change your money around in many investment choices in an IRA, and you can freely move your IRA between IRA custodians (using direct transfers).
Estate planning with an IRA may be less complicated than an employer sponsored retirement plan - something to consider for your beneficiaries. This is another reason to speak with a knowledgeable certified financial planner professional.
With an IRA, you control when and how much to take out (distributions) from your IRA. Just be aware of taxes and age based penalties. The best practice is not to withdraw money until you reach age 59 ½, and take out required minimum distributions starting at age 72.
A bonus with Roth IRAs: no required distributions must be made from during your lifetime.
Roll to your current employer (if accepts rollovers)
You can roll your old plan to your current employer if they allow it. This can help consolidate employer plans and loans may be available to use against the balance. However, there could be limited investment choices (compared to an IRA), and plan fees.
As previously mentioned, estate planning may be more complex with employer plans than with an IRA.
Should you roll over your retirement plan to an IRA or to your current employer plan? If both options are available to you, then it depends on your circumstances. There are pros and cons on both sides and I can help you evaluate your needs and priorities.
Tax Time Bomb – IRS has a party!
This last option (or consequence) is your worst move.
This can happen if you cash in your plan or if a mistake is made in the rollover process.
This is when a taxable distribution is made of your entire plan balance. It's like a tax bomb going off - causing taxes, maybe penalties, possibly climbing up higher tax brackets. The IRS might throw a party!
This move kills the whole purpose of a retirement plan and you lose the benefit of tax-deferred growth (or tax-free in a Roth). Not to mention you might run out of money in retirement.
The wrap
You have options on what to do with your employer sponsored retirement plan. Because these plans are large, involve taxes, and estate planning challenges, I would highly recommend you talk with a certified financial planner professional before making a move. The decision you make may have significant consequences, both now and in the future.
I've helped many people with rollovers and Roth conversion strategies from the largest custodians in the country. Feel free to email me if you need assistance.
John Piershale
John Piershale Wealth Management, LLC is an Investment Adviser registered with the State of IL and in other jurisdictions where exempt from registration. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned.
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