Since the early days of the COVID-19 pandemic, millions of Americans have voluntarily left their jobs as part of “The Great Resignation.” For whatever reason, if you’ve left or are considering leaving your job, don’t forget that savings you’ve accumulated in a workplace retirement plan—such as a 401(k) or 403(b)—is your money. It’s important to keep these funds working for you so your overall retirement plan stays on track.
A choice of three options
What happens to the retirement savings you’ve accumulated through your workplace plan when you no longer work for that employer? The answer is up to you. There are generally three primary options:
1. Leave your money invested in the plan: You will still receive account updates and be able to make changes to your investments within the plan.
2. Roll your money into a new employer’s plan: If you go to work for another employer, you may have the option to roll money from the previous employer’s plan into the new employer’s plan. Ask your new employer if that opportunity is available.
3. Roll your plan dollars into your own IRA: If handled properly, this is not a taxable transaction. This may offer you more flexibility in how to manage your retirement savings.
As you get closer to retirement, be certain that all of the hard work you’ve been doing to build your savings will pay off when you need it later in life.
If you leave money in the former employer’s plan, there is no deadline to move it out. However, you will be required to begin taking minimum annual distributions from the account beginning in the year you reach age 72. Similar distribution rules apply to traditional IRAs.
Why consider an IRA?
There are several reasons to consider moving money out of a workplace retirement plan and into an IRA. Here are some to keep in mind:
1. Retirement plan fees: Fees in some plans can be high. The median plan charges fees of 0.85%, but a number of plans include fees that are close to 1.5%.1
2. Loss of connection: The more time you spend away from your previous employer, the less connected you may feel to the retirement plan sponsored by that employer. It may be easy to lose touch or put off decisions that could affect the portfolio.
3. Simplification: There may be advantages to consolidating assets into fewer accounts to make managing your savings easier.
4. Choice: Most workplace retirement plans have limited investment options compared to what may be available in an IRA.
5. Opportunity: With consolidation of accounts comes the opportunity to look at your financial situation from a big-picture perspective. A financial professional can review where you stand and help you create a plan for retirement.
Control and choice
As you consider your options later in life, you may want more control over your financial situation. While your workplace savings plan dollars belong to you, you have limited control over that money as long as the dollars remain in that plan. Fee structures could change and investment options you prefer may be eliminated. Consolidating retirement savings into one account, or at least fewer accounts, could make it easier to allocate assets into funds that help achieve your investment goals within your risk comfort level.
And because your universe of investment options is likely to be greatly expanded compared to a workplace savings plan, you may also be able to utilize vehicles like annuities that can protect the wealth you’ve already accumulated and provide guaranteed income streams.
Cautions about moving money out of a workplace plan
Before you make any decisions to move money out of a workplace retirement plan and into an IRA, there are several issues you should consider. Here are two examples:
1. If you took a loan from the plan and choose to leave your employer, the outstanding balance of the loan will be due by the federal tax filing deadline following the year you separate from service. Failure to repay it on time means the balance would be considered a distribution from the plan, subject to tax, and if you are under 59½, also subject to a 10% early withdrawal penalty.
2. If you work for a publicly-traded firm and own company stock, there may be advantages to not rolling that portion of the account into an IRA. This is because of a provision in the tax law around “net unrealized appreciation” (NUA). This allows you to take a distribution of the stock into a taxable account. At the time this occurs, you will pay ordinary income tax on the portion of the distribution attributable to the stock’s cost basis. However, any earnings on the stock will not be taxed until you sell the stock, and then at the long-term capital gains tax rate, which is generally more favorable for individuals compared to ordinary income tax rates. The benefits of NUA are lost if you roll that stock into an IRA.
Making the most of your retirement
As you get closer to retirement, be certain that all of the hard work you’ve been doing to build your savings will pay off when you need it later in life. Taking the proper steps with your retirement plan assets today is important. Talk to your financial professional to learn more about your options and to structure a comprehensive plan to prepare for retirement.