4 options for your old employer retirement plan
E*TRADE Securities
Options for an Employer Sponsored Plan such as a 401(k)
If you’ve changed jobs or retired, you may still have retirement assets with your former employer. You have four options for taking control of your money: roll over into an Individual Retirement Account (IRA), leave your money where it is, move your assets to a new employer's plan, or cash out.
Option 1: Rolling over into an IRA
Advantages:
- You may be eligible to take advantage of an array of investment options, including mutual funds and exchange-traded funds (ETFs), as well as individual stocks, bonds, and other products.
- You can continue to actively contribute to your retirement savings and your investments will remain tax-deferred until they are withdrawn, however rolling over may have tax consequences by itself.
- Consolidation may make tracking your assets and their performance easier, allowing you to manage a single account instead of multiple 401(k) plans.
- With an IRA, you have access to your assets at any time (Taxes and penalties apply.)
Disadvantages:
- While an IRA may offer a wide variety of investment options, it might not offer the same options as an employer plan, such as institutional share classes, some of which have expense ratios only offered in this type of account.
- With an IRA, you cannot take a loan against your assets.
- There is limited protection from creditors.
- If you hold appreciated employer stock in your former plan and decide to roll over into an IRA, there could be tax consequences.
- Minimum distributions are required from traditional IRAs beginning at age 72 (70 ½ if born before 6/30/1949). Forgetting to take the minimum distributions may result in a 50% IRS penalty on the amount not distributed as required.
- Depending on the plan and the IRA, as well as the investments in them, an IRA could cost more.
Option 2: Leaving your money where it is
Advantages:
- Leaving your money in your old employee plan (if permitted) allows for continued tax-deferred growth potential.
- Some 401(k) plans give you access to institutional share classes, which may cost less than other alternatives, outside of a qualified retirement plan.
- If you leave the money within a company retirement plan and ultimately leave that company after age 55, you will have penalty-free access to those funds immediately, versus waiting until age 59 ½ for an IRA.
- Plan assets generally have protection from creditors under federal law.
Disadvantages:
- Once you leave your employer, depending on the plan, you may no longer be permitted to make additional contributions to that plan, or be allowed to take loans from the plan.
- Some employers may charge higher plan fees if you are not an active employee.
- Your previous employer may not allow you to remain in your former plan.
Option 3: Move your assets into your new employer’s plan
Advantages:
- Depending on its investment options and features, your new employer's plan may offer reduced fees and costs, as well as different share classes, with plan only expense ratios.
- You can continue to actively contribute to your retirement savings.
- Depending on the plan, you may be able to take a loan against your accumulated retirement assets.
- If you leave the money within a company retirement plan and ultimately leave that company after age 55, you will have penalty-free access to those funds immediately, versus waiting until age 59 ½ for an IRA.
- If you are planning to work beyond age 72 (70 ½ if born before 6/30/1949) , you may be able to delay the required minimum distributions.
Disadvantages:
- There could be differences in plan investment fees, investment choices and administrative fees (like recordkeeping) than your current plan.
- There may be a waiting period before you are allowed to roll over your old plan assets into a new plan.
Option 4: Cash out
Advantages:
- The advantage of this option is the immediate access to cash to use for large expenses, such as a big credit card debt or other priorities.
Disadvantages:
- Cashing out prior to age 59 ½ from your retirement plan counts as an early distribution. This means that there may be taxes and a 10% early withdrawal penalty.
- You’ll be subject to a mandatory 20% withholding fee for federal income taxes and possibly more for state income taxes depending on where you reside.
- Investors who are considering taking a cash distribution of company stock should be aware of IRS rules that might allow them to defer paying taxes on the appreciation. This is typically referred to as "net unrealized appreciation." Learn more about this strategy.
Ready to take control of your old employer retirement plan with a Rollover IRA account?
Want to learn more?
Our interactive rollover tool may help you evaluate your options so you can make an informed decision. You can also call 800-387-2331 to speak with an representative who will help you understand your choices and guide you through the process.
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