Changing jobs can be an exciting and stressful time, and your old company's retirement plan may be the last thing on your agenda as you find your way. However, keeping those funds top of mind as you navigate your next move can be important for ensuring you don't accidentally miss out on money you've earned for the future.
Keep in mind that even if you didn't contribute to your previous employer's qualified retirement plan, such as a 401(k), 403(b), or governmental 457(b), it doesn't necessarily mean you don't have money in it. That's because the company might have put money into the retirement plan for you, and — if you were vested — that money in your account belongs to you, per the plan document. And if you did make contributions, that's yours as well.
While saving for retirement may not top your priority list now, that's likely to change in the coming years. You may be better poised to achieve your long-term financial goals by seriously considering what you want to do with any money you have in your former employer's retirement plan now, so you can take advantage of it in the future.
Here's four options regarding these savings:
1. Roll them into an IRA
Rolling funds directly into an existing or new individual retirement account (IRA) allows them to continue to potentially grow tax deferred or tax-free. In addition, an IRA often gives you more investment options than are typically available in an employer’s plan. Keep in mind, IRA fees and expenses are generally higher than those in a retirement plan.
2. Leave them in your former employer’s retirement plan
This requires nothing of you in the short term — if the retirement plan document rules allow you to do it. However, you may wind up having several jobs over the years, and managing multiple retirement accounts at different financial institutions with these employers can be stressful and confusing in the long run. And you will continue to be subject to the rules of each different retirement plan regarding investment choices, distribution options, and loan availability.
Also, should your old company go bankrupt, you many not get back all the money you contributed.
3. Move them directly into another employer’s retirement plan
Moving your retirement savings directly into another employer’s qualified retirement plan might be an option — again if the retirement plan document rules allow it. This may be appropriate if you want to keep your retirement savings in one account and you’re satisfied with the investment choices your other retirement plan offers.
4. Take a lump-sum distribution
Obviously, this gives you immediate access to the funds. However, when it comes to your future, you should carefully consider all the financial consequences before distributing your retirement plan’s savings. The amount you distribute will lose its tax-advantaged growth potential, and depending on your age, it may be subject to ordinary income taxes and a 10% additional tax (unless you roll it over into an IRA or another retirement plan within 60 days). If you absolutely must access the money, consider distributing only what you need until you can find other sources of cash.
Wells Fargo Advisors does not provide tax or legal advice. Please consult with your tax and legal advisors before taking any action that may have tax or legal consequences and to determine how this information may impact your own situation.
Please keep in mind that rolling over your qualified employer sponsored retirement plan (QRP) assets to an IRA is just one option. You generally have four options for your QRP distribution:
- Roll over your assets into an Individual Retirement Account (IRA)
- Leave assets in your former QRP, if the plan allows
- Move assets to your new/existing QRP, if the plan allows
- Take a lump-sum distribution and pay the associated taxes
Each of these options has advantages and disadvantages and the one that is best depends on your individual circumstances. When considering rolling over your assets from a QRP to an IRA, factors that should be considered and compared between QRPs and IRAs include fees and expenses, services offered, investment options, when you no longer owe the 10%
additional tax for early or pre-59 ½ distributions, treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with QRPs. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
When considering rolling over your assets from a QRP to an IRA, factors that should be considered and compared between QRPs and IRAs include fees and expenses, services offered, investment options, when you no longer owe the 10% additional tax for early distributions, treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with QRPs. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.