What to do with money in a former employer’s retirement plan

In November 2021, 4.5 million American workers voluntarily left their jobs, setting the record for the most departures in a single month. Since then, the so-called Great Resignation has yet to show signs of slowing. Another 4.5 million people quit their jobs in March, and another 4.4 million quit in April, according to the Bureau of Labor Statistics. And some believe the Great Resignation isn’t a temporary phenomenon but a permanent change. Job turnover is 20% higher in the remote- and hybrid-working world, and it’s is likely to stay that way, according to Gartner, a technology-research firm. 

If you recently left (or are planning to leave) a job with a company that provided a retirement plan, you have several options. 

Leaving a workplace retirement plan behind

Most of the time, it’s okay to leave a workplace retirement plan with a former employer while you’re transitioning to a new job, says Andrew Rosen, a certified financial planner and president of Diversified LLC, in Wilmington, Del. However, don’t leave the money behind if you have less than $5,000 in your account, which could happen if you didn’t work for your former employer for very long. When the balance is less than $5,000, the company is permitted to cash out your plan. If that happens, you’ll be required to pay federal and possibly state income taxes on the balance, as well as a 10% penalty if you’re younger than 59½.

Rolling a retirement plan to a new employer

If your new employer allows you to roll your money into its retirement plan, that may be a good option, particularly if it offers a portfolio of solid, low-cost investments. Large plans often offer institutional-class funds that have lower fees than funds you can buy on your own. (That may also be the case with a former employer’s plan.) Plus, you can borrow from your current employer’s plan, which isn’t an option if you leave the money behind or roll it into an IRA.

If you choose to roll the money into your new employer’s plan, make sure you don’t exceed the maximum contribution you can make in a year. Company plan providers are unlikely to communicate with each other and will often let account holders contribute the maximum, even if they’ve rolled over contributions from another employer’s plan. For example, suppose you’re younger than 50 and roll over a plan in which you’ve already contributed $10,000 this year. The maximum you can contribute to your new employer’s plan for the rest of the year is $10,500. If you exceed that amount, you could be subject to a penalty of up to 6% of the excess contribution. 

Rolling over to an IRA

If your new employer doesn’t permit rollovers, or you’re not impressed with its investment options, you can roll your retirement plan into an IRA with any financial services firm.

Rolling over your retirement plan into an IRA could also allow you to build an investment strategy that’s more customized than one you would get in an employer-sponsored plan. Unlike company plans, which typically offer a limited number of funds, IRAs offer a broad menu of investment options. 

If you go that route, make sure you take advantage of resources provided to you by the financial services firm, such as information about the funds, historical fund performance and manager information, to determine the best lineup for you, says Kailyn Neat, a CFP for Bartlett Wealth Management, in Cincinnati.

As you approach retirement, you’ll probably want to shift to a more conservative asset allocation, and an IRA may offer more fixed-income options than you’ll find in a workplace retirement plan. And if you’ve worked for several different employers, rolling the money from each of their plans into an IRA will allow you to consolidate your savings in one place.

This article was written by Emma Patch from Kiplinger and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.