What To Do With Your Old Employer’s Retirement Plan

July 16, 2018

Have you ever had to leave a job and couldn’t decide what to do with your retirement plan? I recently got a Helpline call from a woman who was about to leave her company and had to make that exact decision. Let’s look at the pros and cons of the options:

Option 1: Cash it out

This is generally the worst decision since you have to pay taxes on anything you take out and possibly a 10% penalty if you’re under age 59 ½ and left your employer before the year you turned age 55. If you’re still working at a new job, the tax rate you pay is likely to be higher than it would be if you waited until retirement and if the balance is large enough, it could even push you into a higher tax bracket. You also lose the benefits of future tax-deferred growth.

That being said, if you absolutely need the money to get caught up on bills or to pay off debt, it may be your only choice.

Option 2: Roll it to an IRA

This option generally provides the most flexibility. It allows you to continue deferring the taxes while giving you more investment options than you may have in your current retirement plan. You also have the ability to use the money penalty-free for education expenses and for a first-time home purchase (up to $10k over your lifetime) or to convert it into a Roth IRA to grow potentially tax-free.

Option 3: Roll it into your new employer’s plan

If you want to keep things simple and consolidate everything into one account, this may be the choice for you. Just make sure the new plan allows it. It can also be the best choice if the new plan provides unique investment options that you’d like to take advantage of with this money or if you’d like to have the option of borrowing against it.

Option 4: Leave it where it is

As long as you have at least $5k in the account, most plans will allow you to keep the money there. If you have company stock or any unique investment options that you’d like to keep, this may be the best option for you. It also gives you time to decide during what is likely to be a hectic time in your life. After all, you can always roll it into an IRA or your new employer’s plan later. Just keep in mind that having too many retirement accounts in different places can make it harder to manage them.

In this particular case, the woman decided to simply leave it where it was because she had turned 55 and wanted to have the option to take penalty-free withdrawals if she needed to. If she rolled it into an IRA or a new employer’s plan, she would have had to wait until age 59 ½ to avoid the penalty.

That doesn’t mean it’s the best choice for everyone. Every situation is different. The key is to understand your options so you can make the best choice for you.