Changing jobs often brings a long to do list. New responsibilities, new coworkers, and new routines tend to take center stage, while an old retirement account quietly gets forgotten.
That can be an expensive mistake.
Whether you have a 401(k), a 403(b) commonly used by educators and nonprofit employees, or a 457 plan offered by many government employers, leaving an old retirement account behind without a plan may limit your investment choices and make your retirement savings more difficult to manage. While cashing out is an option, it usually triggers taxes and, for many people, penalties that can significantly reduce the value of years of savings.
For most investors, the better question is whether to roll those funds into a new employer’s retirement plan or into an Individual Retirement Account, commonly known as an IRA. The answer depends on your financial goals, your investment preferences, and how much flexibility you want in retirement.
Rolling your savings into a new employer’s retirement plan offers one obvious advantage: simplicity. Keeping all your retirement assets in one place can make it easier to monitor your progress and adjust your investments over time. Employer sponsored plans also generally provide strong creditor protection under federal law and may include benefits such as participant loans or, in some cases, special withdrawal provisions that are unavailable elsewhere.
The tradeoff is that employer plans usually offer a limited menu of investment options. The plan sponsor determines which funds are available, along with the associated fees, leaving you with less flexibility than you might prefer. The quality of employer plans can also vary considerably, particularly among some 403(b) plans that may include higher cost investment products.
An IRA offers a different kind of advantage: control.
By rolling your retirement savings into an IRA, you gain access to a much broader universe of investments, including individual stocks, bonds, mutual funds, exchange traded funds, and other investment vehicles. You also choose the financial institution and investment strategy that best aligns with your long-term goals. For many investors, this flexibility makes it easier to build a portfolio tailored specifically to their needs while potentially reducing investment costs.
An IRA can also provide greater flexibility when it comes to retirement income planning and estate planning. Some investors choose to consolidate multiple retirement accounts into a single IRA, while others intentionally maintain separate IRAs for different investment strategies or financial objectives.
Many people are surprised to learn that they may not have to wait until they leave their employer before taking advantage of an IRA. Some retirement plans allow what is known as an in service distribution, enabling participants, often after age 59½, to transfer a portion of their retirement savings into an IRA while continuing to work and contribute to the employer’s plan. Depending on the plan’s rules, this strategy can provide greater investment flexibility years before retirement begins.
If your retirement account includes Roth contributions, the rollover decision becomes even more important. Roth assets can generally be transferred into a Roth account within your new employer’s plan or into a Roth IRA. Many investors prefer the Roth IRA because it offers greater investment flexibility and eliminates required minimum distributions during the owner’s lifetime. Careful planning is important, however, since Roth accounts are subject to timing rules that determine when qualified withdrawals become tax free.
Many retirement plans contain both traditional pretax contributions and Roth contributions. In these situations, it often makes sense to split the rollover by moving traditional assets into a Traditional IRA or new employer plan while directing Roth assets into a Roth IRA or Roth employer account. This approach preserves the tax advantages of each type of account while avoiding unnecessary taxes.
Government employees with 457 plans should take special care before making any changes. One of the unique benefits of many governmental 457 plans is the ability to withdraw funds after leaving employment without the early withdrawal penalties that often apply to other retirement accounts. Rolling those assets into an IRA or 401(k) may permanently eliminate that advantage.
There is no one size fits all answer when deciding where your retirement savings should go. Factors such as investment flexibility, fees, creditor protection, tax diversification, withdrawal strategies, and estate planning objectives all deserve careful consideration before deciding.
The good news is that a rollover does not have to be rushed. Taking the time to understand your options and working with a trusted financial advisor can help ensure that your retirement savings continue working toward your long-term goals rather than simply following you from one employer to the next.
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