Back to Basics: Changing Employers? What You Can Do With Your Retirement Plan

Retirement Plan

Back to Basics: Changing Employers? What You Can Do With Your Retirement Plan

A job change can make for a fantastic opportunity to progress in your career. Plus, it’s a chance to refresh, try something new, or begin the next phase of your work life. And, whether you’re looking to take a step up the pay scale, try out a new industry, get big-league benefits, or just keep building your experience, the search alone can come with its own share of exciting challenges. 

Once you find that new job, you’re often left with lots of decisions to make. Which of the excellent health care plan and other benefit options will you choose, and how will you spend that extra week of vacation? And when you get your “work perks” squared away, sure, you might have a whole new company culture to adapt to and set of processes to learn, but you’ll also get to add your new workmates to your networking circle — and maybe even try one of those treadmill desks.  

Another important consideration: Your former employer’s retirement plan. You’ve made great progress diligently saving over the years with your last employer, so what do you do with it now?

Option 1: Leave it where it is.

On the surface, leaving your retirement plan where it is — with your former employer — might seem like the simplest option. It’s one less thing to think and worry about during a time when you probably have a lot on your mind. But before you take it off your to-do list, it’s important to weigh your options. Make sure you’re leaving it there for a good reason, or learn how moving it might benefit you.

Do you have enough in the account to leave it there — or is it below the investment minimum? Some employer-sponsored retirement plan administrators require a minimum balance of $5,000 to continue managing these funds. This could limit your options if your balance falls below that minimum.

Keeping it with your former employer maintains Employee Retirement Income Security Act (ERISA) protections. These protections include requiring plan sponsors to inform participants about the plan and its features, ensuring that plans adhere to certain standards, and mandating that those who advise plan participants or manage the plan are fiduciaries, making plan decisions in participants’ best interests. Moving plan funds to an individual retirement arrangement (IRA) might mean losing these safeguards if the IRA manager isn’t a fiduciary. And outside of a qualified retirement plan, nothing guarantees fiduciary responsibility, unfortunately.

If you’re changing jobs due to a layoff or taking time off work without another job lined up, leaving it may be best until you can open up other options.

Before choosing to leave it there, it can be helpful to know what you’re paying in fees — and what you could be paying with your new employer if you were to move the plan. Also, consider how you’ll manage investments in multiple plans if you leave it. How will you be sure your old plan and a new one will be in line with your investment objectives? That brings me to …

Option 2: Bring it with you to your new employer.

Sure, having all your money in one place could make your financial life easier. But all options considered, is it worth it?

Check with your new employer to see if transferring your former employer’s plan into your new retirement plan is possible. Your new employer will need to offer some type of a retirement plan, like a 401(k) or 403(b), in the first place. And even if they do and you’re able to transfer it, your new employer may mandate a waiting period for participation or a rollover.

Another note on fees: Compare investment options and fee structures. See what’s available in your new plan, and pit it against your previous employer’s plan to see if a move makes sense. Also, consider what you receive for the fees paid. For example, would paying a recordkeeping fee on a large balance from a former employer’s plan make sense when an IRA may charge little or no recordkeeping fees?

Once you’ve made an educated decision to move it, it’s fairly simple to enroll in your new employer’s plan, then roll your former employer’s 401(k) or 403(b) into it. Almost all plans make a trustee-to-trustee transfer or direct rollover possible. You’ll want to avoid handling the funds, like depositing a check to a regular checking account, as this may have unintended tax consequences.

To put it into perspective, if your employer allows you to enroll in a retirement plan after 90 days but you begin the process of indirectly rolling your former employer’s plan over on day one, you could find yourself in some hot water. That’s because, once you take a distribution on a retirement plan, you have 60 days to deposit the funds into another plan. Otherwise, you risk having an incomplete rollover. It involves paying taxes on the funds now treated as ordinary income plus a possible 10% early withdrawal penalty if you’re under age 59½. But there is one more way to bring it with you that doesn’t involve your new employer …

Option 3: Roll it into your Traditional or Roth IRA.

If you decide not to keep your retirement funds with your former employer — or if you can’t — you still have one more option. You can roll the plan into a Traditional or Roth IRA. For those who also choose not to begin saving for retirement via a new employer’s plan or don’t have the option but want to keep the funds earmarked for retirement, this may be the only way to go. But it doesn’t come without its own caveats.

Does moving your plan mean you’ll be investing in the market on your own for the first time or investing a much larger sum than before? If so, you may consider looking for a fiduciary advisor to work with rather than going it alone. Like qualified retirement plan administrators, fiduciary advisors work in your best interest. So, if you move your plan to a fiduciary-managed IRA for recommendations and ongoing management, the same protections you had in your employer-sponsored ERISA-protected retirement plan remain in place. And in Colorado, IRAs and qualified retirement plan accounts are both protected from creditors. That means, if you have a debt that goes to collections, creditors can’t pull funds from your retirement accounts. If you’re considering moving your plan to an IRA and live outside of Colorado, check your state’s laws to see if they protect your IRA.

The IRA option can help further simplify your financial situation by getting all your retirement funds — individual and employer-sponsored — in one place.

If you’re considering moving your 401(k) or 403(b) from a pre-tax balance to an after-tax Roth IRA, be aware of the tax bill that could come with it! It could be a neat tax planning trick, but you’ll have to manage it carefully.

And don’t forget about Net Unrealized Appreciation (NUA)! If you own employer stock in a 401(k) or other tax-favored plan, you may be able to distribute that stock in-kind to a regular taxable brokerage account. With an in-kind distribution, you only pay tax on what you paid for the stock originally (aka your “basis”) — not what it’s worth at that time. Going forward, when you sell the stock, the IRS will tax any gain that existed on your distribution date as a long-term capital gain. It’ll tax any other gain as a short- or long-term gain, depending on your holding period. There are several caveats and considerations, though, making this a strategy that requires some advanced planning.

Of course, you could cash out your 401(k) or 403(b). But, again, remember to watch for those distribution taxes and penalties — and consider how it could impact your retirement planning. Starting over with $0 in retirement savings is likely not ideal. 

What if you’re leaving a former employer to retire? If you’re 55 or older and want to take the cash, you can skip the 10% early withdrawal penalty. Just don’t forget about the taxes you’ll pay on any withdrawals, not counting Roth funds on which you would’ve already paid taxes. And if you choose to leave your plan with your former employer to allow it to continue to grow during retirement, be sure to factor in how RMDs will work once you reach 70½. 

Whatever you decide — or if you just can’t choose on your own — discussing the change and your options with your financial professional can be an important step in making the best decision for you — and your retirement funds.

If you have retirement or financial planning questions, feel free to give me a call or try the new chat feature on our website. 

Want to learn more about planning your financial future? You can visit our How It Works page for information, then simply schedule your no-cost initial financial planning consultation.

Jason Speciner
jason@fpfoco.com

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of Financial Planning Fort Collins, a 100% employee-owned and fee-only firm. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and XY Planning Network (XYPN). Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.



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Assets Under ManagementFee as a % of AUM
$100,000 - $249,9991.00%
$250,000 - $499,9990.90%
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MINIMUM ACCOUNT SIZE
There is a minimum initial investment of $100,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities.

Minimums do not apply to inStream proactive financial planning as a stand-alone service.
ANNUAL FEE
Assets Under ManagementFee as a % of AUM
$100,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 or more0.50%

inStream proactive financial planning as a stand-alone service: $1,000/year or $100/month
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FINANCIAL PLANNING
Financial planning services are ongoing, and include unlimited phone, email, web and in-person meeting and consultation time. Pricing is based on the unique circumstances of each client situation. Generally, there is a one-time plan development fee ranging from $500 - $2,000 and a monthly fee of $150 - $500; cancel anytime. Clients utilizing investment management services with portfolios of $500,000 or more will typically receive financial planning services for no additional fee.
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Assets Under Management (AUM)Annual fee as % of AUM or flat-dollar
$0 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 - $2,999,9990.50%
$3,000,000 - $3,999,999$15,000
$4,000,000 - $4,999,999$20,000
$5,000,000 or more$25,000 + $2,000 per additional $1mm
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ESTIMATE YOUR FEE
Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your investable net worth, which is generally your total net worth, excluding your primary residence. Your investable net worth includes the value of cash, bonds, stocks, mutual funds, rental real estate, and other business or financial interests. Our transparent pricing aligns with the holistic nature and value of our comprehensive services. You can use the chart below to estimate your fee based on your investable net worth. In some circumstances, your fee may be more than the minimums in the chart below.
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+ $1,000per additional $1,000,000 of INW