You have decided to leave your employer. You are taking a step to help your career path or your income or work for a company or industry that is more in line with your skills and belief system. But as someone interested in providing for yourself in retirement, you have been taking part in the employer sponsored retirement plan with your current organization with a 401(k) account, 403(b) account, 457(b) account, or a SIMPLE IRA. So, what happens to that money when you leave?
Most employers give you the following options: leaving the money in your current account, moving the money into another account, or cashing out the account.
Leaving the Money
- If you leave the money, it sits in an investment account, hopefully compounding until you are ready to withdraw cash at retirement. With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment returns hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.
- There are drawbacks to leaving money in an old employer’s plan. You can’t add to it, and often you are limited in the changing investment choices. It can be hard to implement a long-term investment strategy without control of investment choices.
- If you move jobs frequently, there is a good possibility you can lose track of accounts, not be informed of changes to the fund, and might miss out on lower fees in other plans.
Moving the Money
- You can move or rollover your account into either a pre-tax or post-tax account depending on what type of account it is originally. Meaning if you have a Traditional 401(k), 403(b), or 457(b) account, you can roll it into another Traditional 401(k), 403(b), 457(b), or Traditional IRA account. If you have a Roth 401(k), 403(b), or 457(b) account, then it would need to move into a Roth 401(k), 403(b), 457(b), or Roth IRA account.
- With a SIMPLE IRA, you need to wait at least two years from the accounts opening to roll it over to prevent being charged a 25% penalty when under the age 59 ½, but after that time, you can roll it into a Traditional 401(k), 403(b), 457(b) or Traditional IRA.
- Rolling over a 401(k), 403(b), 457(b) to a current 401(k), 403(b), 457(b), or to an IRA allows you more control of your money. Fees vary from account to account, but the three categories are investment fees, plan administration fees, and individual service fees. It is necessary to understand how much you are paying in fees, whether it is an employer sponsored plan or an individual account.
- Rollovers don’t trigger tax collection or the 10% additional penalties that cashing out an account does before the age of 59 ½.
- If you do change job frequently, having a Traditional or Roth IRA or both where you rollover all old accounts might make control and growth of your retirement money more straightforward in the long run. There are RMDs required at 72 from the Traditional IRA type of account even if you are still working, but if it is a Roth 401(k) rollover to Roth IRA, then there are no RMDs at any age.
Cashing The Money Out
- For 401(k) and 403(b) accounts, you will be taxed not only for the withdrawal, which is 10% but an additional 10% penalty if you cashed it out before the minimum age of 59 ½. There are some exemptions to the early withdrawal penalty for 401(k) and 403(b) accounts- if you are permanently and totally disabled, if you lose your job at 55, if you have medical expenses that exceed 10% of your modified adjusted gross income, with some divorce settlement types and if you die. 457(b) accounts don’t have early withdrawal penalties.
- For SIMPLE IRA, you will be charged 10% tax and an additional 25% penalty when under the age of 59 ½ if you don’t wait for two years from the opening of the account and an additional 10% penalty if the account is older than two years. There are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you have medical expenses that exceed 10% of your modified adjusted gross income, the cost for your medical insurance while you’re unemployed, your qualified higher education expenses, the amount to buy, build or rebuild a first home (up to $10,000), your withdrawal is in the form of an annuity, your withdrawal is a qualified reservist distribution, you’re the beneficiary of a deceased SIMPLE IRA owner or the withdrawal is the result of an IRS levy
- If you cash out, you will also lose out on all of the potential earnings of the money if it sat untouched in an investment account. Investment accounts that hold stocks, bonds, and mutual funds historically had 7% -10% annual gains, though that type of increase isn’t guaranteed.
- Cashing out a retirement account before retirement should be a last resort.
Advisory services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. This material has been prepared for informational purposes.