BY: TIM RENSCH, QKA®, RETIREMENT SERVICES RELATIONSHIP MANAGER
Transitioning to a new career chapter is an emotional milestone. Whether you are moving toward a fresh opportunity or heading into retirement, your old workplace savings plan—be it a 401(k), 403(b), or 457(b)—represents a significant portion of your financial future.
To ensure your hard-earned savings continue to work for you, it is essential to weigh the pros and cons of these four primary options.
1. Stay Put: Leave Money in Your Former Plan
Most employers allow you to keep your assets where they are, provided your balance meets certain thresholds (typically over $7,000).
• The Pros: Your money continues to grow tax-deferred, and you may retain access to unique, low-cost institutional investment options. Furthermore, if you left your job at age 55 or older, you may be eligible for penalty-free withdrawals.
• The Cons: You cannot make new contributions or take out loans. Additionally, some plans may limit withdrawal flexibility, requiring you to take the full balance rather than partial amounts.
2. The Move: Roll Over to a New Employer’s Plan
If your new employer accepts rollovers, “stacking” your retirement accounts can simplify your financial life.
• The Pros: Consolidating accounts makes management easier and keeps your savings under a single tax-deferred umbrella. It also maintains broad federal protection against creditors and may allow you to defer Required Minimum Distributions (RMDs) if you continue working past age 73.
• The Cons: You are subject to the new plan’s specific rules and investment menu, which may be more limited than your previous one.
3. The Pivot: Roll Over into an IRA
A Rollover IRA offers the most control over your investment landscape.
• The Pros: You gain access to a much broader range of investment choices compared to most employer plans. You can also move Roth assets independently into a Roth IRA. If you are self-employed, you can roll these funds into a SEP IRA or Solo 401(k).
• The Cons: IRAs generally have less federal creditor protection than workplace plans. Additionally, RMDs must begin at age 73 (or 75 for those born in 1960 or later) regardless of your employment status.
4. The Last Resort: Cashing Out
While it may be tempting to take the lump sum, this is rarely the best financial move.
• The Risk: If you are under age 59½, you will likely face ordinary income taxes plus a 10% early withdrawal penalty. For example, cashing out $50,000 could result in losing $15,000 or more to taxes and penalties, while also halting the power of compound growth.
Pro-Tip: The “Direct Rollover” Advantage
When moving funds, always request a Direct Rollover. This ensures the money moves directly from one institution to another. If the check is made payable to you, the plan administrator is required to withhold 20% for federal taxes. To avoid penalties, you would then have only 60 days to deposit the full amount (including the 20% you didn’t receive) into a new account—a stressful and often expensive hurdle.
Making an Informed Choice
Your decision should align with your risk tolerance, time horizon, and fee sensitivity. Before acting:
1. Check the rules: Review the specific bylaws of both your old and new plans.
2. Compare fees: Look at administrative costs and investment expense ratios.
3. Consult a pro: If you feel overwhelmed, reach out to a financial professional at Heartland Trust Company to get help evaluating the many factors you’ll have to consider.
