June 15, 2017. By Lori Patterson:
There are many emotions that accompany a job change. Excitement and anxiety tend to top the list as you mentally prepare for a new addition to your resume. When in the midst of a career move, you may be busy buttoning up old projects, studying a new industry, or simply trying to enjoy any time off you may have during the transition. An important item to add to the ‘to-do’ list, however, is what to do with your employer sponsored retirement plan upon your departure from company. Here are a few considerations regarding the proper way to handle your 401(k), 403(b), and similar retirement plans when switching jobs:
Consider the implications of leaving your funds in the old plan. One mistake that people often make when changing jobs is to ignore their 401(k) altogether. When doing so, the plan may be forgotten, the beneficiary election can become stale, and you may become out of touch with any associated fee or investment option changes. We often hear from clients that they have lost track of old plans and have not received statements or maintained online access to the plan. If you choose to keep your assets with the previous company the funds may remain invested as usual, however some plans require distributions be made for low balance accounts if an employee has separated from the company in order to remain cost effective for administrative expenses. In short, you may be relinquishing some control if the assets are not moved to a new plan or retirement account. Again, this may not be the case, however it is important to have this discussion with your plan sponsor and continue to monitor your 401(k) regularly.
Be educated about your rollover options. You may choose to transfer/rollover the funds into a 401(k) plan with your new employer if they accept outside funds. Alternatively, you may opt to transfer the funds into a self-directed IRA. If you do not have a self-directed IRA, one can easily be established with the help of your financial advisor. If you already have an IRA account, 401(k) funds can be rolled over into this account once you leave the company for the benefit of account consolidation.
Although a new IRA account may be simple to set up, whether it is the best option will depend on your individual circumstances, so be sure to consider all of the factors involved in your rollover in order to make an educated decision. These include but are not limited to: i) the investment options available in the plan versus the investment options available in an IRA, ii) fees and expenses in the plan versus the fees and expenses in an IRA, iii) the services and responsiveness of the plan’s investment professionals versus that of an advisor, iv) protection of assets from creditors and legal judgments, v) required minimum distributions and age considerations, and vi) employer stock tax consequences.
Avoid penalties and unnecessary taxes. One misconception people seem to have is thinking they have only two options: 1) leave the funds in the employer plan or 2) cash out the plan and receive a check for the balance thus incurring big penalties. While it is true that taking a disbursement from your 401(k) prior to the age of 591/2 can create a 10% penalty if the disbursement does not comply with certain IRS guidelines, you should be aware that the funds can be transferred between plans before retirement age without penalties or taxes if done correctly. Rest assured this transfer process is very common, and not as daunting as you may think.
If you are choosing to roll your funds over, simply have the funds deposited into an IRA or the new 401(k) plan within 60 days to avoid taxation of any distributed funds, and keep good records of the related transactions. To help with record keeping and proof of following this procedure, it is helpful to avoid having the check mailed or paid directly to you as the account owner. The disbursement check should be paid directly to the custodian of the new account. For Centerpoint IRA clients*, this would mean having the plan administrator at your previous employer make the check payable to “National Financial Services” or “NFS” with your name and account number in the memo, and having the check mailed directly to our office.
Lastly, do not be afraid to ask plenty of questions before you make your final decision. Although it might not seem so during the busy transition between companies, you will thank yourself later for addressing your retirement plan now.
*Before coordinating any employer plan transfer, please contact us to discuss any fees that may be involved and whether or not a rollover is in your best interest.