Manage Retirement Accounts When You Change Jobs
Leaving or starting a new job means it’s time to make decisions about your new and old retirement plan. To minimize the financial impact of your retirement plan delay any actions until you understand your options.
Options for Your Existing Retirement Plan
You can’t close or move your retirement account at your workplace until you are no longer employed there. Consider these options before you make your move.
Don’t cash it out. Resist the temptation to cash out your account. Considering the taxes, penalties, and long-term setback to your retirement savings, the cash-out option should be considered only as a last resort.
Leave it. Keep the money in your old employer’s plan. This may be an option if your account value is $5,000 or more and until you have weighed all your options. Your money will continue to accumulate tax-deferred interest. You still can move it without penalty to a new employer's qualified plan or an IRA at a later date.
You will not be able to make any further contributions to the old plan. You are limited to the investment options offered by the plan, but can change how your money is invested within those options.
Roll over to an IRA. Consider rolling it over to a traditional IRA, a tax-deferred individual account that can receive retirement money from a qualified employer plan. All earnings will continue to compound and accumulate on a tax-deferred basis. You can open an IRA through almost any large financial institution, including banks and brokerage firms. The major difference between most institutions is the fee structure. Make sure to carefully compare fees before opening your IRA.
If you have an existing Roth IRA, you can transfer your existing retirement plan into it, but the move will trigger taxes. That’s because the money is going from an account built with pre-tax contributions into an account that accepts only after-tax contributions.
Blend the old plan with the new. Roll the money over to your new employer’s retirement plan. Check that the new plan accepts such transactions. If it does, the smart way to do the rollover is to transfer the funds directly to your new plan using a trustee-to-trustee transfer. Don’t have the trustee of the old plan make the check out to you to deposit in the new plan or you will trigger taxes and possible penalties.
Optimize the New Plan
Every retirement plan is different. Get to know your new plan in order to optimize its benefits and avoid any penalties. Don’t spend too long reviewing the options, just sign up and you can adjust later.
Questions to ask. What kind of plan(s) does the new employer offer? Does the employer match contributions? How much does it match, and up to what percentage of pay?
Waiting periods. Some companies require employees to wait a certain amount of time before they can start contributing to a plan, which can temporarily delay potential growth of your retirement savings. Consider an alternate plan in the interim, such as opening and contributing to a traditional individual retirement account (IRA) or moving your assets into an already existing Roth IRA.
How long should you stay? Employers often use vesting schedules for their retirement plans. This means the longer an employee stays at the company, the higher the percentage of employer-contributed assets is available to them. By law, the total vesting period can’t exceed five years.
How soon you leave a company before you are fully vested determines what percentage of that plan’s employer-contributed assets you can take with you. For example, in a five-year vesting schedule, if you leave after the first year, you can take only 20 percent of what the employer contributed; after the second year, 40 percent; and so on until after your fifth year, when you reach 100 percent. You always own 100 percent of whatever money you put into your retirement account, plus however much that money has grown