Rolling Over Your Abandoned Retirement Plan
Ask any headline writer for any major periodical and they’ll tell you the same thing in various dramatic fashion: we’re in the midst of a great migration as employees have been changing employers in droves. This means a lot of things in terms of personal finances for those making the switch, but let’s take a moment to talk about your portable retirement accounts (401(k)s, 403(b)s and the like). You know, the ones that you left behind all lonely and abandoned when you switched jobs.
What will you do with the money in that old plan? In terms of options that won’t trigger a tax liability, you can leave it where it is, roll it into your new employer’s plan, or roll it into an IRA. There are a couple of considerations to make when trying to decide which of these options makes the most sense.
1. Leaving money in your old employer’s plan
Some plans have rules preventing it, but unless the plan administrator tells you otherwise you can typically leave your money right where it is without any big issues. You can’t make any additional contributions to the account or roll any money into it. Basically, you can’t do anything NEW with this plan—most likely you can simply manage the asset allocation and request distributions.
John’s Top Tip: If you have an outstanding loan balance against your retirement plan, make sure you understand how the plan will treat your loan once you leave. Some plans will allow you to continue to make payments. Others will require you to pay the loan balance off in full or the unpaid amount will be viewed as a distribution. The custodian or your HR department should be able to give you information on this.
If you received a surprise 1099 from your retirement plan that wasn’t for a rollover, this might be why. Don’t panic: you have until your tax filing deadline to deposit the amount of the loan that the plan reported as a distribution. You might want to get a tax professional involved, though.
2. Rolling into your new employer’s plan
If your new employer has a retirement plan, you can usually roll over your old retirement plan into the new one (there are a few restrictions on this, so check with your new plan custodian just to make sure). This is probably a better bet than keeping your money in your previous employer’s plan. At the very least, it means keeping an eye on only one account instead of multiple (for investments, beneficiary designations, etc.).
Employer plans offer a few advantages over IRAs:
a. Typically lower fees than IRAs.
b. Higher contribution limits and no income restrictions on the deductibility of contributions.
c. No income limits on Roth contributions if available in employer-sponsored plan.
d. Some plans offer shelter of assets from creditors while IRAs do not.
John’s Top Tip: You may want to roll at least enough money into your new employer’s plan so that you would be able to take a plan loan quickly if you needed to. Per current rules, making sure that you have an account balance of $100,000 or more will mean that you can take the maximum plan loan amount of $50,000 if you ended up in a pickle (as long as your plan allows for loans).
3. Rolling into an IRA
Some of you may know I’ve been teaching a class on retirement planning. I’ve been making sure that my students understand the advantages of both keeping your retirement assets in an employer-sponsored plan and the advantages of rolling over to an IRA. Ultimately, you should make an informed decision.
When you roll over the assets into an IRA, there can be several advantages versus just rolling everything into an employer-sponsored plan:
a. More investment options—employer-sponsored plans are typically limited to a few mutual funds to which the plan has access. The right IRA with the right advisor has access to a large “universe” of investment options.
b. You can have the investments in the account managed by an asset manager who understands your risk tolerance and time horizon.
c. If you decide that you want to make deductible IRA contributions and your income qualifies you to do so, you already have the IRA set up.
John’s Top Tip: You can typically roll money INTO an employer-sponsored retirement plan from an IRA as long as you’re working for that employer, but there are heavy restrictions on when you can roll money OUT of an employer-sponsored plan and into an IRA (typically need to be separated from service or beyond a certain age so that you qualify for what’s called an “in-service rollover”). As such, if you have any thoughts that you might want an advisor to have direct management of the funds that you’re rolling over, it may make sense to roll your old plan funds into an IRA so that can happen.
Also keep in mind that as long as you are eligible to participate at work, you can still make contributions to your new employer-sponsored plan even if you roll your previous employer’s plan balance into an IRA instead of the new plan.
If you decide to roll over your employer-sponsored plan to an IRA, be sure that you’re working with a reputable advisor who is going to invest your money according to a disciplined investment approach. The investment industry is being flooded by individuals who have no right calling themselves financial advisors. Avoid professionals offering to invest your money by charging commissions or “loads”.
We have a guide on our website about how to choose the right financial advisor for your needs. If you have an employer-sponsored plan from a previous employer that you left behind, reach out to me at jhowe@gencapmgmt.com and we can at least make sure you have the knowledge and understanding that you need to make the best decision for your specific situation.
