Navigating Retirement Plan Rollovers When Changing Jobs

The COVID-19 pandemic and other factors have led to significant job changes for many Americans over the past year or so. If you’re planning to switch employers in the near future, it's crucial to manage your retirement plan with care to protect your financial future.

Leave It As Is

If your retirement plan with your previous employer has a balance of at least $5,000, you have the option to leave your money in that plan. While this might seem like the easiest option, it comes with potential risks. Your former employer may limit your ability to make changes to your portfolio, take distributions, or update your beneficiaries. Additionally, as an inactive participant, you might face higher fees and receive less effective plan communications compared to active employees.

Before making any decisions, consider consulting with your financial advisor—especially if your previous employer's plan offers unique investment options that could be difficult to replicate elsewhere.

Roll It Over

Rolling over your retirement savings into your new employer’s plan can help you avoid the drawbacks of leaving your money in the old plan or managing multiple accounts. However, before proceeding, carefully review the investment options available in your new employer’s plan.

Be aware of any fees or charges associated with rolling your old plan balance into the new plan. If the fees are significant, you might want to either keep your savings in the old plan or roll your account balance into an IRA while continuing to contribute to your new employer’s plan.

If a rollover into your new employer’s plan is the best option, first confirm that the plan accepts rollovers. Assuming it does, request a direct “trustee-to-trustee” rollover. This ensures that your funds are transferred directly between financial institutions, avoiding unnecessary complications. If your old employer sends you a distribution check instead, they will withhold 20% for taxes, and you’ll have just 60 days to deposit the funds into your new plan. To achieve a full 100% rollover, you must use other funds to cover the 20% withholding.

Failing to meet the 60-day deadline or lacking the cash to cover the taxes withheld could result in paying income tax on the unrolled amount. If you’re under age 59½, you might also incur a 10% early withdrawal penalty.

IRA Transfer

Transferring your retirement savings into an IRA often provides access to a broader range of investment options than most 401(k) plans offer. Many financial services companies facilitate direct transfers, which can simplify the process and help you avoid costly mistakes.

In some cases, your assets can be transferred “in kind,” meaning you can move certain investments without having to sell them first. However, be mindful that rolling your savings into an IRA might come with an annual fee.

Cash Out

Cashing out your retirement savings should generally be considered a last resort, unless you need the money for essential expenses. Distributions are taxed as ordinary income, and if you’re under age 59½, you may also face a 10% early withdrawal penalty.

There are exceptions to the penalty—such as for economic hardship or if you separate from service at age 55 or older. However, even if you qualify for an exception, you’ll still owe ordinary income tax on the distribution.

Protect Your Nest Egg

Don’t let the complexities of changing jobs distract you from safeguarding your retirement savings. Contact us for expert guidance on managing your rollover options and ensuring your financial future remains secure.