When changing jobs from one employer to another, here are the options for the money in your old retirement plan. While choosing the best option depends on individual circumstances, knowledge of the four typical options listed below will guide you through making the decision.
Option 1: Request a lump sum distribution
Taking a lump sum distribution gives you cash in hand immediately, but may not be ideal due to income tax implications and possible penalties due to the distribution before retirement age.
Option 2: Leave it with in previous employer’s plan (Do nothing option)
If allowed, leaving funds in your ex-employer’s plan lets you continue tax-deferred growth for your savings. Typical employer plans allow you to continue in the plan unless your accumulated funds in the plan are less than $5,000. If your funds are less than $5,000, the plan could force you to rollover the funds. If the plan has a good menu of low cost investments, this may be a good place to keep your retirement funds.
Option 3: Rollover to your new employer’s plan
In order to roll over funds from your ex-employer’s plan to your new employer’s plan, two conditions should be satisfied. 1) Your new employer should offer a qualified plan, and 2) Your new employer’s plan should allow you to rollover your tax-deferred funds from your ex-employer’s plan. When these two conditions are satisfied, you will be able to consolidate your savings at one place, and perhaps gain access to a better choice of investments and lower costs.
Option 4: Rollover to an IRA
Rolling over to an IRA gives you the greatest control of where and how you Invest the funds. This is a great benefit if you want to take advantage of low-cost ETF investing or invest in products allowed in IRAs, or want to hire a financial advisor to professionally manage the funds.
In addition, rolling over to an IRA enjoys the benefit of penalty-free withdrawals for qualifying first-time home purchase or qualified education expenses if you are under the retirement age of 59½. However, due to loss of employer oversight (ERISA and fiduciary protections), IRA assets have less protection from federal law as compared to the assets in employer qualified plans.
If you are at all unsure about the your choices and the benefitas and drawbacks of any of these options, please seek advice from a financial professional.