Scenario: you spent months searching, networking, interviewing, and finally, you landed a new job. Congrats! All that’s left to do is to pack up your cubicle, hold your exit interview, and hit the road, right?
Not so fast.
While you may understandably be focused on your exciting new role, benefits, and healthcare options, don’t forget that you still have a smart decision to make about your old employer’s 401(k). This is perhaps the biggest mistake that people make when leaving a job – according to a report from the Bureau of Labor Statistics, the average person born between 1957 and 1964 has changed jobs about 12 times during their lives, and stats show that as many as 41 percent of all investors have at least one “orphan” 401(k), with accounts averaging $47,000.
Whether or not you’ve encountered the phrase “time value of money,” I think we can all agree that $47,000 isn’t chump change, so let’s skip ahead to your options. There are a lot of rules governing what you do with your retirement savings, because retirement accounts are tax advantaged, meaning your earnings grow tax-deferred; and the IRS likes it when you pay your taxes, so unless you are actually using your retirement account to save for retirement, you’ll have to pay up.
There are four main paths you can take. So see below for the simple version (those of us who prefer the TL;DR can also call a financial advisor for more guidance).
You Could Stick with Your Old Employer’s Plan.
This one seems counterintuitive. Didn’t I just read that the biggest mistake was leaving my money behind? Well, yes. And there are risks here. For example, your former employer could go out of business, which may make it difficult to receive information and keep track of your plan. Some plans, especially small ones, don’t let you stay on board. And simpler is usually better, so consolidating accounts may make it easiest to manage your savings. However, for well-established companies, the plan may be comprehensive, you’re happy with its performance, and you may decide to stay put. If so, just make sure you’re staying on top of it. The asset allocation you selected when you joined the firm as a bright-eyed 23-year-old may no longer be appropriate for you once you get closer to retirement age.
Move Your Assets to Your New Employer’s Plan.
OK, you decided you’d rather keep it simple and have your assets in one place. First, confirm that your new employer’s plan accepts transfers. Then, make sure that you like your options (if you’re totally lost in mutual fund expense ratios and asset allocations, a financial advisor would be happy to review these with you before you make a decision). The good news is that these direct (AKA custodian-to-custodian) transfers are unlimited in the eyes of the IRS, so even if you make more than one move in a year, you won’t owe taxes.
Move Your Assets to an Individual Retirement Account (IRA).
You could also use the direct transfer option to move your assets into an IRA (this just means a retirement account that you manage and contribute to, versus one with paycheck deductions and contributions from an employer). The benefits here could be increased investment options, and more personalized advice from a financial advisor that you get to know. Advisors provide more than just investment management, we also like to get an understanding of your goals, values, and situation both before and after retirement, in order to customize a strategy for you. This actually doesn’t have to be an or decision – even if you move your assets to a new employer, you can still open an IRA account and contribute up to a certain maximum ($6,000 in 2019, if you’re under 50), even if you’re covered by an employer’s plan — sounds like a nice way to get ahead of the curve. If you go this route, make sure you understand your advisor’s fee and commission structure.
Receive a Distribution from the Plan.
Big mistake, huge! Well, for many of us. There are some exceptions, but generally, cashing out your 401(k), or any other tax-advantaged savings account, before the age of 59½ doesn’t just incur income tax, it also triggers a 10 percent penalty. What if you (whoops) already did? Don’t worry. There’s another type of “indirect” transfer, which gives you 60 days from the time that you withdraw your funds to invest them in another retirement plan (AKA, any of the options above). You can only make one of these per year (unlike direct transfers which are unlimited).
The rules can get complex, and yes, if you decide to move your account(s), you may end up having to get on the phone with a plan provider or two and listen to some hold music. But take the time to take the reins on your retirement. Your future self will thank you!