Leaving your last employer, what should you do with your previous retirement account?

Ekenna Anya Gafu, CFP®, AAMS®
by in 0Published on May 27, 2021

I recently read an article highlighting a Gallup’s Millennial report that showed 21% of Millennials (born 1980-1996) have changed jobs in the last year. For comparison that is 3x the amount for non-millennials. Which got me to reflect on recent conversations with my clients, and a continuous topic it seems of what are the options for your previous employer’s retirement plan. Because of my past experience as a financial consultant, and a current Certified Financial Planner (CFP), I wanted to provide the most common 4 options and general pros & cons of each choice.

Leave it with past employer:

For most people, if you elect to do nothing you are actually choosing to leave it with the past employer.
Pros: This is the least effort option, and generally clients are familiar with their current investment and investment options.
Cons: Most employers cover custodian cost in total or cover most of fees, however once you leave, most plans pass those cost to you. In addition, 401k investment choices are limited compared to having a self-directed account.

Move it to current 401k

Certain employer plans accept a rollover from your previous employer to their own plan.
Pros: This keeps everything under one roof, making it easier to manage and monitor.
Cons: It’s a flip of a coin if your current employer will allow for this type of rollover. And again, 401k options generally are much more restrictive in investment options than a rollover or Roth IRA.

Rollover to Individual Retirement Account (IRA)

You can elect to rollover your own contribution and vested portion of your employer contribution to a Rollover (pre-tax) or a Roth (post-tax) account.
Pros: This gives you the most options for investments and will generally avoid any account maintenance fees.
Cons: This gives you the most options for investments, meaning unless you hire someone to do it for you, you now are 100% in control of your investments.

Move to Cash

Generally most plans will provide an option that allows you to cash out your 401K/403B to your bank or other account.
Pros: If in a financial crunch this can be the relief you need.
Cons: Most places that allow you to cash out your account unless you have reached age 59 ½ are going to require a 20% federal withholding. In addition if under 59 ½ you will also be accessed a 10% premature tax penalty along with whatever federal and/or state taxes are applicable.

My final thoughts:

These are general explanations of different plans and options, for your unique situation it may be prudent for you to have a conversation with a financial advisor. With that said, in most situations because of the tax penalty and taxation involved, it not advisable to take the money as cash. When deciding if you should leave it there, roll over to another plan or move to an Individual Retirement Account (IRA) the main questions should be: Do you have time, interest, or ability to manage your own money? If yes then rolling over generally becomes the recommendation. If no, then it becomes a question of what fees are you currently paying and would that be difference if you moved the account.

I hope you enjoyed this insight, and if you have any questions don’t hesitate to reach out.

Ekenna Anya-Gafu, CFP®, AAMS®
Director of Planning
650-781-8880

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