What to do with retirement accounts held in previous employer plans?
Not so long ago most folks would get a job when they completed their schooling and stay at that same employer until retirement. I have an Aunt and Uncle who did this. They graduated, got married and started work. She retired as a mammographer from a local hospital and he was a civil engineer with the State. They each worked for 40 years and retired. They may have changed their positions at their employer but they remained and were loyal to their employer from the day they were hired to the day they retired.
Today, that rarely happens. I'll use myself as an example. I went from working at a courthouse, to a small title insurance company, to a small law firm, to another small law firm. Each place had their own retirement plans and each plan was different. So I had four different retirement accounts all held at different places. How many do you have?
In thinking about our old retirement accounts with old employers, we often just don't know what to do with them. Or we choose the easiest option because we don't know what would be best. Here are 5 options:
- You may not have to do anything! If it doesn't bother you to have a few random retirement accounts hanging around and the previous employer plan allows the account to remain there, then that's an option. However, you may not be able to add more money into that account. Also, you may lose the benefit of paying lower fees on the holdings than you did when you were a participant of the plan.
- Perhaps roll it over into your new employers plan. Some plans allow this, but not all. Obviously, you are able to make contributions to this plan. You will need to check with your new employers plan administrator to see if this is an option.
- Roll the retirement funds into an IRA at another institution. If eligible, at that point you could make additional contributions and may have access to more mutual funds than you had previously. There are numerous institutions to choose from, each with an abundance of funds to choose from.
- Cash it out. Maybe you have debt to pay off, or just want to have the cash. However, if you are under the age of 59 1/2 you will have to pay a 10% penalty PLUS income tax on whatever you cash out. There are a few narrow exemptions to this, but by and large you will receive significantly less than what is in the account after it is cashed out due to penalties and taxes.
- A ROTH conversion. This converts your 401(k) or traditional IRA that had tax-deferred money into a ROTH IRA. A ROTH IRA is a type of retirement account that grows tax-deferred and after age 59 1/2 the money can be taken out tax-free. Converting pre-tax money into a ROTH does mean you would have to pay income tax on the money converted. For some folks, this can save them money on income taxes in the long-term. It is important to consult a professional, a financial professional and/or accountant to know what your tax liabilities will be and if this is the best choice for you.
Knowing with certainty what to do can be difficult. Even within these five options, there are other choices to make. Consulting a professional is an easy way to get the advice you need to make an informed decision on your individual situation.
If you or someone you know would like to know what their best choice would be, contact me at Landmark Financial Services for a no-cost evaluation. I can be reached at 802-877-2300 or kittredge_morgan@nlgroupmail.com.
TC108137(0619)1