You have successfully navigated the job market and landed a new opportunity—congratulations!
When changing jobs, there are a number of logistical items to consider that you perhaps have not been forced to think about since accepting your last job opportunity. How would you prefer to be paid? What are the benefits that you are able to opt into? One item you’ll also likely need to take action on is your employer-sponsored retirement plan. If you had a retirement plan at your previous employer, such as a 401(k), what are your options moving forward now that you are no longer with the company?
There are essentially four options to consider:
Read on for a breakdown of the options:
Generally, your previous employer will allow you to keep your retirement plan in place as is. This is a viable option if you like the investment options available to you there. Additionally, if your new employer only makes contributing to a retirement plan available to you after a certain number of months, leaving your old plan in place may be a good option for the time being. You can always change your mind and decide further down the road that you’d like to go in a different direction.
What are the drawbacks to this option? Your previous employer may have certain rules and restrictions that you’ll need to follow, such as a requirement to take action on your plan if you have a minimal balance (usually $5,000 or less). Check with the appropriate individual at your previous employer to learn of restrictions that may apply to you. Some additional items to consider: you will not be able to contribute new funds to the plan once you have left the company and it may be more difficult to track exactly where you’re at on the road to retirement if you have plans in multiple places.
If your new employer offers a qualified retirement plan that you have the option to opt into, you may be able to choose to transfer your retirement savings from your previous plan to your new plan. Choosing to do this via a direct transfer can eliminate the risk of being taxed for any withdrawals and make it a relatively painless process. Transferring your previous plan over into your new plan can also make it easier to track your progress and allow your funds to all grow together.
Be sure to discuss the logistics of this process with the appropriate individuals from both employers first to ensure that the transaction is possible. Some employers may prefer to send a check of your balance to the new employer or may not offer direct transfers.1 Confirming the details with both employers will help you to avoid confusion throughout the process.
Another option is to roll your previous plan over into an independent retirement account, or IRA. You may roll over your retirement plan’s funds to an existing IRA or open up a new one in order to receive the funds. An IRA can offer you more control and can broaden your investment options in comparison to the potentially limited options offered by an employer-sponsored retirement plan. If you are not satisfied with the investment options offered by your new employer’s plan or if your new employer does not offer a retirement plan option, this may be an attractive route for you. There are many advantages and disadvantages to choosing an IRA over an employer-sponsored retirement plan. However, whether it is the right option for you varies from person to person—your financial advisor can help with whether or not this option could be beneficial for you.
Taking a cash distribution may be tempting, yet is almost always a poor choice. While it would provide you with a lump sum of cash to use at your disposal immediately, you would also lose out on the tax deferral benefits that a retirement plan offers and would have to pay at least federal income tax, and possibly state tax, on the amount withdrawn. Furthermore, if you are under the age of 59 ½, taking a cash distribution could force you to face an early distribution penalty.2 Lastly, taking a withdrawal instead of keeping the funds in a tax-deferred retirement plan could result in a huge lost opportunity in the long run. A small balance now could grow enormously if left invested for years instead of withdrawing it early.
Making an informed choice concerning the options available to you is crucial as it has a direct financial impact on your future retirement. The world of retirement savings vehicles is increasingly complex and consulting with a financial advisor can be helpful to get additional insight if you are not convinced about which option is most appropriate for you. For those with additional considerations, such as those with retirement plans in place at multiple employers or those approaching the traditional retirement age, a financial professional can be an invaluable resource.
Written by North Star Resource Group.
1 IRS. “Rollovers of Retirement Plan and IRA Distributions.” https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions. Accessed September 25, 2017.
2 IRS. “401(k) Resource Guide – Plan Participants – General Distribution Rules.” https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules. Accessed September 25, 2017.
Financial Advisors do not provide specific tax or legal advice. This information should not be considered as specific tax or legal advice. You should consult your tax or legal advisor regarding your own specific tax or legal situation.
North Star Consultants, Inc. - Insurance Products and Services. CRI Securities, LLC – Securities and Investments. Securian Financial Services, Inc. - Variable Products and Securities. North Star Resource Group offers securities and investment advisory services through CRI Securities, LLC and Securian Financial Services, Inc. CRI Securities, LLC is affiliated with Securian Financial Services, Inc. Members FINRA/SIPC. North Star Resource Group is not affiliated with Securian Financial Services, Inc. North Star Resource Group is independently owned and operated. North Star Resource Group | 2701 University Ave SE | Minneapolis, MN 55414. 1907085 / DOFU 09-2017