What should you do when you change employers and have a leftover retirement plan?


Chelse Stevens of Capital Finance explains some options for getting your 401k in order after transitioning to a new company.

The average American changes companies every 4.5 years leaving a trail of 401ks in their midst. But what should you do when you change employers and have a leftover retirement plan?

Financial planner Chelse Stevens with Capital Financial Group wrote up the following tips for what move might be best for you:

When someone changed jobs and had a retirement plan what are their options?

This is a really common question. More than 1/3 of people in job transition don't know what they should do with these retirement assets. You have four options: keep the assets at your current employer, roll the assets out into an Ira or Roth IRA, roll the assets to your new employer and cash the assets out.

Keeping the assets at your current employer

Keeping your 401k at your current employer is allowed most of the time by your plan. By doing this you are keeping your assets invested, tax deferred, and you are investing at institutional or lower prices since you are in a group. Some things to consider are if your balance is under $5k you might be forced to take the assets, that is a common provision. Also, you typically can not contribute anymore to the plan since you are no longer employed there, and your investment choices are limited to what the plan had available.

Rolling the assets out into an IRA
You can put your assets into an account that you choose the investment giving you more autonomy. Also, you are able to contribute to this account as well as get a more complete picture of your assets if you have them at the same institution so your balances come in on one statement. Also, you have the option to convert that ira to a Roth IRA. Some things to consider are that expenses can be higher in an ira vs. your old 401k or employer sponsored plan and you will be required to take required minimum distributions at age 70 1/2.

Consolidating into a new employer sponsored plan

First, you would need to make sure this is an option, not all employer sponsored plans allow this. After you figure out that's an option you have similar benefits of keeping it at the old plan. Being deferred growth, lower expenses, and creditor protection and deferred RMDS after 70 1/2. And you have the added benefit of consolidating your assets so making your life easier and having the ability to contribute.

Cashing out your old 401k

This is an option I have seen all too often people take because it seems easiest and they don't understand what they are doing or paying for. More than 50 percent of people asked if they would cash out again they wouldn't. Typically if you are under 59 1/2 and cash out you will be taxed as well as assessed a 10 percent penalty. So if you took out $10,000 that could be a total of taxes and penalties of $2,500 to $5,000 depending on your tax bracket.

Some things to consider
- Each tax implication
- Fees and expenses
- Contribution rules
- Investment choices
- Ease of information and simplicity

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