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Don’t Leave Your Money Behind: What to Do with Retirement Savings When Changing Employers

“Where do you see yourself in five years?” Chances are, you have been asked this at least once during a job interview, and the question is more relevant now than ever before. While not a certainty, the possibility of changing jobs at least once during a career has significantly grown over time. According to the Bureau of Labor Statistics, by January 2020, the median number of years that wage and salary workers stayed at one job was 4.1 years.

In 2021 we saw the Great Resignation, with many people striving for a greater work/life balance and a slew of pandemic-related employment changes. Add to that fact, most companies no longer offer a pension to employees to encourage tenure. Whatever the reason, people are spending less time than ever at one employer, which means there are more decisions to be made about what to do with a retirement account due to a change in employers, and ultimately retirement.

The good news is you have multiple options for what to do with your retirement savings when you leave an employer. These options include keeping the account right where it is, rolling it over to an Individual Retirement Account (IRA), or moving the account over to your new employer’s retirement plan (if applicable). Each option has its own benefits, and Pathfinder Wealth Consulting is here to help you make the best decision for your unique situation.

Note: We sometimes get asked if it’s a good idea to liquidate a retirement account and take a full distribution when you leave your employer. While this is an option, and seems straightforward, it rarely results in an ideal outcome due to the taxes, potential penalties, and other long-term impacts the distribution would have on your financial plan.

Now that you know your options, how do you determine which option is best for you? Some items to consider when making this decision include investment options, fees, and distribution needs.

Investment Options: Most 401(k) plans have a limited array of investment options, which could tie your hands if you’re seeking to further diversify the types of investments in your portfolio. Rolling out your funds into an IRA often provides a wider range of investment options. However, the investments offered within 401(k) plans are usually excellent, despite the limited number available, so it is important to compare the available investments in your former employer’s plan lineup to a new employer’s, and to other investments available outside of the 401(k) universe, before making the change.

Fees: Along with having access to a wider range of investment selections, you may also be able to find investments that have lower expenses than those inside of a 401(k) lineup. Plan providers may also charge additional recordkeeping fees if you keep your assets in the plan of a former employer, since you no longer qualify for that employee benefit. There are also cost considerations when choosing to invest in an outside IRA, so it is important to understand all potential fees associated with any account changes to help make the right decision.

Distribution Needs: If you decide to roll over your 401(k) into an IRA, it could still make sense to leave a portion in your current 401(k) plan, especially if this account makes up the majority of your savings and investments, and you are planning to retire early. This is because 401(k)s have more favorable distribution rules than IRAs for people between the ages of 55 and 59 ½, meaning you can access that balance without penalty. If you move the entire 401(k) balance into an IRA, you must wait until age 59 ½ before withdrawing funds to avoid a tax penalty.

If you are contemplating a job change or retirement, determining what to do with your significant nest egg is a decision that will have long lasting impacts on your overall financial plan. Whether it’s comparing and selecting the right investments, analyzing fees and other expenses, or determining the right time to start taking distributions, at Pathfinder Wealth Consulting our team of CERTIFIED FINANCIAL PLANNER™ professionals regularly guide clients to and through this exciting life phase to help keep their long-term plan on track and plan for income needs in retirement. If you would like to talk more about your retirement funds in motion, give us a call at 910-793-0616 today. We are here to guide you forward.

If your employer-sponsored plan account holds significantly appreciated employer stock, you should carefully consider the negative tax implications of transferring the stock to an IRA against the risk of being overly concentrated in employer stock. You should also understand that your financial advisor may earn commissions or advisory fees as a result of a rollover that may not otherwise be earned if you leave your plan assets in your old or a new employer-sponsored plan and that there may be account transfer, opening, and/or closing fees associated with a rollover. This list of considerations is not exhaustive. Your decision whether or not to roll over your assets from an employer-sponsored plan into an IRA should be discussed with your financial advisor and your tax professional.