By Guest Blogger, Kathleen Charles
One item on your to-do list when changing jobs is to decide what to do with your qualified retirement plan, such as a 401k, 457 or 403b Plan. With the average employee changing jobs 12 times over the course of their career, this may not be an infrequent decision.
A plan participant leaving an employer typically has four options and may engage in a combination of these options, each choice having its own advantages and disadvantages. The employee can keep their assets in their former employer’s plan if permitted; they can roll over the assets to the new employer’s plan, again if permitted; they can roll over the assets to an IRA; or, they can cash out the plan assets. This last option will cause all of the money cashed out of the plan to be taxed.
If qualified plans are available from both the former and current employer, employees should examine the investment options and the fees for both plans.
You can review your investment options on several websites, such as www.morningstar.com. You should also determine if there are sufficient investment choices to cover a wide variety of asset classes. Some plans offer only a few choices, and this could be insufficient for a large account.
In reviewing the fees, one should look at the cost charged to both the employer and employee since both costs can be a drag on return. In addition, the expense ratio for each of the mutual funds and/or exchange traded funds in the plan should be reviewed as these too can lower your return especially over the long-term.
Once you have determined if your current plan or the new plan is best, the next step is to compare that plan with an IRA. The decision whether to keep your investments in a company plan or roll the assets to an IRA can depend on several factors.
Pros to Moving Your Account to an IRA
- By moving your 401k to an IRA each time you change jobs you consolidate all of your retirement accounts into one which should make it easier to keep track of your investments. Also, over the course of time companies may merge, go out of business or change custodians for their qualified plans. This may make it difficult to keep track of your accounts.
- An IRA can provide many more investment options than does the typical company plan.
- Managing your assets and planning for retirement can be easier if your assets are in fewer accounts.
- Investment costs and fees often decline as a percentage as your account gets larger.
Cons to Moving Your Account to an IRA
- If you worry that you could be sued, assets in a 401k are better protected from creditors than they are in IRAs.
- If you hold company stock there may be tax advantages to keeping your account at your old employer until you retire since the IRS offers a provision that allows for a more favorable capital gains tax rate on the Net Unrealized Appreciation (NUA) of employer stock held in the employer’s qualified plan.
- Most company qualified plans have provisions for taking a loan from an account. You cannot take a loan from an IRA.
- Since your company is supposed to act as a fiduciary in managing the company plan there may be professional oversight on the plan and perhaps some guidance for asset allocation.
Logistics – How to Make the Move
When moving your account from one company plan to another you should call the custodian for the new plan and get instructions from them as to how to best move the assets.
If you are moving from a company plan to an IRA you should first open an IRA at a new custodian. The next step is to tell the custodian that you want to do a “Direct Rollover” of your account to your IRA. They will provide instructions as to how best to do this. By doing a direct rollover, from custodian to custodian, you avoid any potential tax problems or having the IRS view the transfer as a distribution and not a rollover.
Kathleen Charles is an independent Certified Financial Planner® affiliated with LPL Financial who has provided comprehensive goals-based financial advice for over twenty years. Her clients consist of individuals, multi-generational families and small business owners. Her areas of professional experience include investment strategy, retirement planning, college funding, estate planning, risk management and business planning. Her prior experience was as an equities analyst for the investment bank Hambrecht & Quist in San Francisco.
Ms. Charles’ qualifications include the Certified Financial Planner® credential, a Masters of Business Administration in Finance from the Haas School of Business at the University of California – Berkeley, and Bachelor of Science and Masters of Science degrees from the University of Michigan at Ann Arbor. She holds FINRA Series 7, 63, and 65 securities registrations held through LPL Financial, the California insurance license, and has passed the first exam of the Chartered Financial Analyst (CFA) designation.