Retirement accounts today offer a lot of flexibility. If you leave your job for any reason—whether you quit your job, lose your job, take time off or retire—you typically have a number of options for your savings:
- Keep it where it is
- Roll it over to a new employer’s plan
- Roll it over to an IRA
- Take it out in cash
- Choose lifetime income from an annuity (if retiring)
Each of these options comes with different benefits, different rules and different fees—including potential penalties if not handled properly. Here are some things to consider to help you decide what may be right for you.
Note: These options apply to fully vested employer-sponsored retirement plan accounts such as a 401(k), 403(b) or governmental 457(b) plan as well as SEP and SIMPLE IRAs. Rules may differ between plans, so always check with the employer for the specifics of your plan. The options do not necessarily apply to pensions, defined benefits plans or other types of employer retirement programs.
You can generally choose this option if you have at least $7,000 in your workplace retirement plan. Otherwise, the employer may require you to move it (see “Limitations” below).
Pros
You may want to leave your savings in your previous employer’s plan if you like the plan’s investment options and other benefits, the plan has low fees or you want to move your savings to a new employer’s plan later. This maintains the tax advantages and allows you to continue investing toward your goals without making any changes now.
Cons
Once you leave your employer, you can no longer contribute to the plan. If you’ll be contributing to a new employer’s retirement plan, this leaves you with multiple accounts to track and may make it harder to effectively manage your overall saving and investing strategy. You’re limited to the plan’s investment and distribution choices, and you may miss out on the potential benefits of other options.
Limitations
Some retirement plans may not permit you to keep your account if you’re no longer working with the employer, especially if you have a low balance.
If you have less than $1,000 in the account, your employer will likely close the account automatically and pay out the balance to you, subject to a 20% mandatory tax withholding. If you want to continue investing the money for retirement and avoid any taxes or penalties, you have 60 days to roll over the money to an IRA or a new employer’s plan.
If you have between $1,000 and $7,000, your employer may automatically roll over your balance to an IRA in your name. If you prefer, you may be able to have the employer transfer the money directly to a new employer’s plan or your own IRA instead.
If you plan to keep working and already have a new job, you can generally roll over, or transfer, funds from a previous employer’s retirement plan to your new employer’s plan, as applicable. This maintains the tax advantages, avoids potential taxes and penalties for early withdrawals and keeps your savings invested.
Pros
With this option, you can take advantage of your new employer’s plan benefits, which may include new investment options, better support and planning resources, or lower fees. Keeping your retirement savings together in one place gives you fewer accounts to track and may make it easier to manage your saving and investing strategy.
Cons
You should review the costs and benefits of your new plan carefully. Funds placed in the plan will be limited to your new plan’s investment options and subject to its rules and restrictions. Consider whether this or another option aligns best with your goals.
Limitations
Some employers have a waiting period before you can participate in their retirement plan. This may delay your ability to roll over savings from a previous employer into the plan.
An individual retirement account, or IRA, allows you to save for retirement on your own—separately from a workplace retirement plan. IRAs are available from banks and other financial institutions. Transferring money from your workplace retirement plan to an IRA may be appropriate if you don’t yet have a new job or prefer to consolidate retirement money from multiple accounts together in one place that’s not tied to an employer. Rollovers are not considered contributions, so the general contribution limits do not apply.
Pros
Rollovers to an IRA from most qualified retirement plans are accepted, allowing you to maintain the tax advantages on your retirement savings and avoid potential taxes and penalties for early withdrawals. Your account would not be subject to any employer plan restrictions, and you would not be limited to your employer’s chosen investment menu. Administrative fees may also be lower than an employer-sponsored plan.
You’d have access to a wide range of investment options, including low-cost mutual funds. IRAs also allow penalty-free withdrawals for disability, a first-time home purchase (up to $10,000), qualified higher education expenses, health insurance premiums if you are unemployed and more.
You also have the option to transfer your retirement savings to either a traditional IRA for pretax savings or a Roth IRA for after-tax savings. If you roll over pretax savings to a Roth IRA, however, you would owe ordinary income taxes on that money at your current tax rate. After that, you’d get tax-free growth on your savings and tax-free withdrawals if required conditions are met.1
Cons
IRAs do not offer loan options, and withdrawals prior to age 59½ that do not qualify for an exception such as those listed above may be subject to taxes and an additional 10% tax penalty.
While the administrative fees on an IRA may be lower than an employer-sponsored retirement plan, retail fund costs (expense ratios) may be higher since employers may have access to lower-cost institutional investment funds. Always compare costs to be sure this is the right option for you.
For more about IRAs, visit “Understanding IRAs and which one may make sense for you.”
When leaving a job, you generally have the opportunity to take out your retirement savings in cash. However, this can be a costly option, so consider it carefully before deciding.
Pros
With a lump sum distribution, you’ll have immediate access to your funds after any taxes, penalties and loans are paid off. That money is available to do with what you want, including any type of investing.
Cons
Any retirement money that’s withdrawn but not rolled over to another qualified retirement plan within 60 days will be subject to ordinary income tax on any previously untaxed amounts and may be subject to an additional 10% tax penalty if you’re under age 55 (59½ for SEP or SIMPLE IRAs). If the withdrawal is from a SIMPLE IRA within two years of first participating, the additional tax penalty is 25% instead of 10%. There’s no additional tax penalty on withdrawals from a governmental 457(b) plan when leaving your job. You may also be subject to withdrawal charges, as applicable.
Since a lump sum withdrawal is considered income in the year you receive it, consider whether the additional amount may bump you into a higher tax bracket, increasing your taxes even more. Lump sum distributions are subject to mandatory 20% tax withholding. You’ll also lose the tax advantages of a retirement account going forward and may undermine your long-term savings potential.
Again, if you withdraw some or all of your balance, you can still decide to roll it over to a new employer’s plan or to an IRA within 60 days of receiving the distribution.
If you’re retiring, you generally have the options to keep your money where it is, roll it over to an IRA, or take it out in a lump sum. You may also want to consider turning a portion of your savings into lifetime income through an annuity.
Pros
Annuities can offer income in retirement that lasts the rest of your life, even if your money would have otherwise run out. You can choose from a range of options, including those designed to grow your income or provide protected income for you or for you and a spouse or partner. You’ll have the flexibility to choose a payment option that aligns with your needs. Lifetime income may help ensure that you’ll be able to cover basic expenses no matter how long you live.
Cons
Annuity options vary widely, but in many cases, once you’ve converted your savings to lifetime income and chosen your payment options, you may not be able to make changes to the agreement, or contract. You may also be subject to additional fees in exchange for the lifetime income benefits. Always compare the costs and benefits carefully to determine what’s right for you.
For more about annuities, visit “It’s time for a fresh look at annuities.”