Morgan Stanley
  • Wealth Management
  • Apr 6, 2022

Understanding Your Retirement Plan Options When You Leave a Job

You have several choices for what to do with your qualified retirement plan when you leave a job. Deciding among them is an important step in managing your retirement savings over time.

One of the hardest parts about planning for retirement is getting started. If you opened and saved through a 401(k) plan at a former employer, you should pat yourself on the back for making a smart decision, even if you are no longer at that job or planning to leave soon.

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When you change jobs, regulations make it easy for you to keep investing those savings tax-deferred, as long as you don’t simply cash out. In addition to losing out on the considerable benefit of tax deferred growth on pre-tax earnings, cashing out can incur hefty penalties. Generally, if you withdraw money from your 401(k) account before age 59 1/2, you will need to pay a 10% early withdrawal penalty, in addition to income tax, on the distribution.

You generally have three other options for handling your 401(k) when you leave your job: You can leave the funds in your former employer’s plan (if permitted), roll over the funds to your new employer’s plan (if one is available and if rollovers are permitted), or roll them over into an investment firm’s Individual Retirement Account. 

Below are a few key points to consider:

  • If your new employer offers a high-quality 401(k) plan that matches part of your contributions, you may want to consider rolling over the assets from your old plan into your new one. Rolling over into a new 401(k) helps you avoid retirement plan sprawl. If you don’t consolidate plans at each job, you may end up with a half dozen separate retirement accounts in your career, making it hard to tell if your savings are on track.
  • You may want to compare plan fees and investment options before you make this decision. To compare fees, check the plan’s annual report and individual fund documents. You can usually check what investment options are available online through the 401(k) provider’s website.

  • If you aren’t moving to a new job with an appealing 401(k) plan, you may want to consider opening an individual retirement account (IRA) and rolling your 401(k) savings into that. You can choose a firm that both offers the kind of investment options you are looking for and that may give you access to advice. While many 401(k) plans offer some resources to participants, this is generally not a strong suit. You may appreciate the greater support for investment decisions and holistic wealth management that individual retirement accounts often make available.

  • There are other factors based on your individual facts and circumstances that you may want to consider before you make this decision.  Each option offers advantages and disadvantages, depending on your particular facts and circumstances (including your financial needs and your particular goals and objectives). Some of the factors you should consider when making a rollover decision include (among other things) the differences in: (1) investment options, (2) fees and expenses, (3) services, (4) penalty-free withdrawals, (5) creditor protection in bankruptcy and from legal judgments, (6) Required Minimum Distributions or “RMDs”, and (7) the tax treatment of employer stock if you hold such in your current plan. The decision of which option to select is a complicated one and must take into consideration your total financial picture. To reach an informed decision, you should also discuss your 401(k) options with your legal or tax advisor.

Rolling over your 401(k), whether into an IRA or your new company plan, may take a bit of administrative work, but isn’t difficult to do. In both cases, you reach out to the new plan provider or the investment firm you plan to work with and let them know you will be rolling over assets from an old plan. Then, contact the old 401(k) plan provider and initiate the process to make a qualified distribution into a new qualified account. Your 401(k) plan provider may send you a check made out to the new custodian, with your name on it to ensure that it is deposited to the right account.

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