• Shelley Yates

What to Do With Your Retirement Plan When Changing Jobs: Part One

Are you changing jobs? If so, you may be thinking about what to do with the retirement plan savings you have accrued. Your goal is likely to maximize your retirement savings and minimize the taxes you pay on them, but it isn’t always clear how best to do that for your own personal situation. Whenever you change employers, you generally have four retirement plan distribution options:

  • Roll over your money into an IRA

  • Keep your savings in your former employer’s plan, if allowed

  • Transfer your assets into your new employer’s plan, if allowed

  • Take a lump-sum distribution

Each options has factors to consider in terms of investment choices, expenses, services offered and more. This week, we will weigh the pros and cons of the first two options, and next time we will focus on the last two.

Rolling Over into an IRA

Some of the main benefits of rolling your assets into an IRA include:

  • Tax-deferred growth potential and more investment choices

  • Allows for additional contributions, if eligible

  • IRAs can be combined and handled by one provider, reducing trustee costs and consolidating statements

  • Combined amount of your RMDs can be taken from any of your Traditional, SEP, or SIMPLE IRAs

However, you should also consider that:

  • Fees may be higher than in an employer-sponsored retirement plan and may also depend on the investments your choose

  • Early distributions may be subject to 10% IRS tax penalty in addition to income tax

  • Leaving the money in the former employer plan may allow RMDs to be delayed until you retire and may provide additional protection against creditors

  • Net unrealized appreciation (NUA) is the difference between what you paid for employer securities and their increased value. You lose favorable tax treatment of NUA if the funds are rolled into an IRA.

Leave Your Assets in Former Employer’s Plan

A few primary benefits of leaving your assets in your former employer’s plan include:

  • No immediate action required from you (no paperwork, investment changes, etc.) and continued tax-deferred growth

  • Fees and expenses may be lower in an employer-sponsored retirement plan than an IRA

  • Avoidance of 10% IRS tax penalty on plan distributions if you retire at age 55 or older (50 or older for certain public safety workers)

  • May allow RMDs to be delayed until you retire and may provide additional protection against creditors

  • Favorable tax treatment of NUA if applicable

However, you should also consider that:

  • Former employer may enforce restrictions on former employee accounts, such as not allowing additional contributions, and any loans may become due when you leave that employer

  • New employer may not allow you to rollover your former employer’s plan into the new employer’s plan

  • Aggregation of RMDs is not allowed in employer-sponsored plans; RMDs must be taken from each plan separately

If you’re changing jobs, it’s important to consider what you’ll do with the retirement plan savings you have accrued. Above we discussed two options, rolling the assets into an IRA or leaving it in your former employer’s plan, and next time we’ll discuss two other options, transferring your assets into your new employer’s plan or taking a lump-sum distribution.

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