What should I do with an old retirement account when I leave my job? That is a question asked by tens of thousands of people every year. With more and more people leaving their jobs to find better fits and higher incomes, this question is asked pretty often. There are few options. Some of the options are better than others. And some of the options will depend on your own particular situation. But let’s dive into your retirement plan options after you leave your job.
(1) Roll The Old Retirement Plan Into Your New Retirement Plan
The first option is to roll your previous retirement plan into your retirement plan at your new job. This is probably the most simple way to handle your old retirement account. To do this, you simply need to go to your old retirement account administrator (probably someone in the HR department) and tell them that you want to roll it over to the retirement account at your new job. You’ll probably have to have the account number, your social security number, etc. to do so but it’s really a pretty simple process.
Before you do this you need to know a couple things:
- Are the investment options good or crappy in your new retirement plan?
- Are the fees really high or are pretty modest?
You can talk to your old and new retirement plan administrator to get the answers to these questions. If the options in your new plan are crap and/or they have high fees, you probably don’t want to roll your old retirement account into the new one.
But if the options are good and the fees are reasonable, this might be a good option for you.
This is certainly the most simple way to handle your old retirement account. You only have to remember one username and password and the funds are all in one place.
(2) Roll The Old Retirement Plan Into An IRA
This is also a good option for a lot of people. In this case, think of an IRA as a squirrel nest. The squirrel will go from one area of the forest and get a nut and bring it back to the nest, then go to another area of the forest and get another nut and bring it back to the nest, and so on.
You can treat an IRA like the squirrel treats their nest. When you leave an employer, you can open an IRA with any company you desire and then roll your retirement plan into that IRA. When you leave your new job you can roll that retirement account into that same IRA. You can do this after you leave each job for your working lifetime.
The benefits to this are that when you open an IRA, you can invest in ANYTHING you want (that is permitted in a retirement account by the IRS). Whereas, if you roll your old retirement plan into the new retirement plan you are limited to the investments of that particular plan.
There is a downside, however. Besides having to know the username and password for both your IRA as well as your new retirement plan, an IRA does not have all of the same protections as a 401k, 403b, TSP, etc. has.
A regular retirement plan that you have at a job is called an ERISA retirement plan. All ERISA plans are protected from creditors. So if you get sued or have a garnishment set upon you, they cannot get any money in your retirement plan so long as it is an ERISA plan.
If you roll the funds from an old retirement plan into an IRA, the first roughly $1.2 million is protected from judgements and creditors. Anything above that can be taken through a court judgement.
That is certainly something to consider because as you age and save more and more money, you will hopefully have well above $1.2 million.
(3) Leave The Old Retirement Account Where It Is
The third thing that you can do with an old retirement account is simply leave it where it is. Just leave it with the old company and don’t get into it until you need to retire.
The biggest danger of this is simply forgetting about it. It might sound silly, but a lot of people forget about their previous retirement accounts at previous jobs especially if they had that job a long time ago.
However, even if you want to leave it where it is, you may not be able to. If your old retirement account is less than $5,000 you may not have the option to leave it where it is. Your old retirement account may force you to either (1) take the money out or (2) roll it into another account.
I have seen very few circumstances where someone should leave their old retirement account at the previous company once they have moved on to a different employer, but it does happen.
If you were working for a company that had a really good retirement account and you have a lot of money in the account and you go to work for something like a start-up where you won’t have a retirement account there, you might want to consider leaving it.
Also, if you are almost at retirement, you might not want to go through the immediate hassle of rolling it over. You could just take the distributions as retirement income as soon as you retire.
(4) Cash Out The Old Retirement Account
This is BY FAR the worst option. If you cash out your retirement plan you really hurt yourself in the long run.
First, you will have to pay taxes AND a penalty. You may have to pay state income taxes depending on your state as well.
Second, you unplug all of the earnings that your old retirement account was making so now you have to start over.
I have seen SOOO many people use the natural inflection point of changing jobs to cash out a retirement account and buy a new boat, or put in a new pool, or take a really nice vacation.
DON’T DO IT!
Either let the money sit where it is, roll it into an IRA, or roll it into your new retirement account, but DO NOT cash it out.
Final Thoughts
There are obviously some elements to think through when you change jobs. One of those should be the retirement account. How good is the new old one and what should you do with the old one.
Please do what you can to make a good financial move that will propel you forward in your personal financial life.
At the end of the day, the most important thing is that you actually save money for retirement. Sure, some options are better than others. But if you just save AND NOT CASH OUT YOUR OLD RETIREMENT ACCOUNT you will be way ahead of the curve.
I hope I haven’t been too clear. 🙂
Until next time!
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