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I recently read an article highlighting a Gallup’s Millennial report which 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 prompted me to reflect upon many recent conversations with my clients regarding maximization of the options available from your previous employer’s retirement plan. Because of my 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 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 custodial costs in total or cover most fees, however once you leave most plans pass those costs on to you. In addition, 401k investment choices are limited compared to 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 versus 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.
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 which will allow 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 which allow you to cash out your account (unless you have reached age 59 1⁄2) are going to require a 20% federal withholding. In addition, if under age 59 1⁄2 you will also be assessed 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 to consider are: Do you have the 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 which fees are you currently paying and what may be the difference if you decide to move the account. I hope this insight has been helpful to you. If I can provide you with additional information for your unique financial investments, please don’t hesitate to contact me.
Ekenna Anya-Gafu, CFP®, AAMS®
Director of Planning
650-781-8880
