what to do with your former employer's retirement plan
Financial Planning

What to do With Your Former Employer’s Retirement Plan

When leaving your current job, you will have to decide what to do with your former employer's retirement plan. Detailed here are some options.

There are multiple things you can do with a former employer’s 401(k) or 403(b). Here I will detail what to do with your former employer’s retirement plan. 

Many times, people tend to forget about the retirement savings that they have accumulated in former employer’s retirement plans, and they just sit there!  While this can sometimes be beneficial to individual in some respects, leaving funds unattended can have some negative side effects.

Below I answer the questions of what to do with your former employer’s retirement plan, and detail some considerations for each choice.

What to do With Your Former Employer’s Retirement Plan?

You can leave it sitting as is, where it is.

Benefits
  • It can continue to grow tax deferred.
  • There are more creditor protections with a 401(k) versus other accounts, if creditor protection is a priority for you.
  • You typically have funds within the 401(k) that have a lower expense ratio than others.
Drawbacks
  • It probably isn’t being rebalanced. Remember – rebalancing is where you rebalance the account back to the original allocation.  It effectively “sells high, buys low” which is a great way to trim areas that did well, and buy into areas that may do better later. 
  • Limited investment options.  Many times, there are only several funds you can choose from in your employer plan, many of them target-date funds.  There may be better options elsewhere. 
  • This probably isn’t being monitored by an advisor.  Because of that, there also may be opportunities missed without changes to your allocation every so often.  While it’s important to maintain a broad allocation, there are satellite shifts an advisor can help you with to take advantage of opportunities or mitigate downside risk, while maintaining exposure to various asset classes.

Roll over to new workplace plan.

Benefits
  • This helps keeps things consolidated for you.
  • Continues with tax deferred growth, and there is no tax impact on the rollover if done correctly.
  • If you are over 72 and still working at your employer, you have the option to defer your required minimum distributions until after you stop working.
Drawbacks
  • Many of the same considerations exist that are similar to leaving it in a former plan – your account may not be actively monitored (except by you), and there could be limited investment options.

Roll over to an IRA.

Benefits
  • Rolling to an IRA managed by an advisor typically offers more investment options and investment flexibility than a 401(k) or 403(b) may.  This may help reduce internal investment fees, broaden diversification, and customize your investment selections.
  • Using an advisor you have active management watching over your account, making allocation adjustments, and rebalancing. 
  • Continues tax deferred growth. 
  • More withdrawal options if you are under 59 ½ (for example, first time home purchase).
Drawbacks
  • RMD must be taken at 72, even if still working. 

You should take note that fees could be more complex within an advisory account or brokerage account, so be sure to know which one you are choosing and weigh the fee options available.

Cash out.  

Technically, you can withdraw the money for cash.  More than likely, this is not a recommended scenario and should be avoided unless there is an extenuating circumstance.

Drawbacks
  • You lose out on tax deferred growth that compounds over time.    If you’re still in the accumulation phase of life, this compounded growth works harder for you in the account that it would by taking it in cash. 
  • If you’re under 59 ½ (in some cases, 55), you could incur a 10% penalty for withdrawing.
  • You will have to pay income tax (both federal and state) on the amount you withdraw.

What to do With Your Former Employer’s Retirement Plan – Summary

As you can see, there are multiple things to consider when deciding what to do with an old account, and making the wrong choice will create adverse consequences. 

I hope that this article detailing what to do with your former employer’s retirement plan shed some light on all of your options, and their potential benefits and drawbacks.

I am happy to help you weigh these options, and help make the choice that’s best for your situation.  Any questions, please let me know.

Be sure to check out other financial planning or investing related articles like this one!


Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Marshall & Sterling Wealth Advisors, a Registered Investment Advisor. Marshall & Sterling Wealth Advisors and Marshall & Sterling Wealth Management are separate entities from LPL financial.

Opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations. To determine which investment may be appropriate for you, consult with your attorney, accountant, or financial advisor prior to investing. 

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment, tax, or legal advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

Kelsey is a Wealth Planning Advisor and Certified Public Accountant at Marshall & Sterling Wealth Advisors, located in the New York tri-state area. Kelsey enjoys working with those who feel they find themselves juggling various financial goals and they aren’t sure where to put their money first. Whether it’s saving for their children’s education, maximizing corporate benefits large corporations, or wanting to know if they can afford that dream upstate house, she helps them pull the pieces together into a clear path to success. Kelsey has an MBA and B.S in Accounting from Alfred University. She also holds her Series 7 with LPL Financial, Series 66 with LPL Financial and Marshall & Sterling Wealth Advisors , and New York life insurance and annuity license. Prior to working in wealth management, she worked as an auditor in both the public and private accounting industries. In her free time she enjoys running and exercising, reading, and she is an enthusiastic supporter of local businesses, specifically in the Hudson Valley. She can be reached at reached at kponesse@ms-wealth.com or 845-554-1046 x2353. You can read more about Kelsey and Marshall & Sterling Wealth Advisors at www.ms-wealth.com.

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