What to do with your retirement plan when you leave

One of the most common requests I receive from clients when they quit or retire is, “Help me move my retirement account from my old company.” I always have the same one word response – “Why?”

When making any decision it is important to ask that question. When deciding what to do with your retirement account it is even more so since you normally have a few options available to you. Also keep in mind that everyone’s situation is different, and while I may address 90% of the situations here, 10% of you can respond with “yea, but in my case …”

There are four options that are typically available to everyone:

1)  Take the money

2)  Roll it into an IRA

3)  Keep it with your old company

4)  Move it to your new company

Why take the money?

You need to spend the money now. This is only reason to use this option. If you do not need the money, remove this option from consideration. Remember if you take the money, there is a mandatory 20% withholding and, if you are younger than 59 ½, a 10% penalty.

Why roll into an IRA

Rolling into an IRA will give you more flexibility than keeping your money in the company plan. You are not restricted as to your investment options (except from the IRS – you cannot buy a Monet painting for example). You also have less paperwork and can normally get your money easier. Roth conversions are easier-and you can decide to recharacterize the conversion later, which is not allowed in a plan.

There are exemptions to the 10% early distribution penalty that are only available to IRAs. Higher education expenses and First-time home purchase are well known but you can also take money for health insurance premiums if you are unemployed. Please note that the money is penalty free but not tax free – the IRS is still getting theirs.

While rules for retirement plans are established by the Department of Labor (ERISA) and the IRS, plans are afforded the opportunity to have additional rules that restrict your options for withdrawals, beneficiary designations, account consolidation, and more. Just because ERISA says you are allowed to do something does not mean your plan will allow it.

Finally you need to be aware of Net Unrealized Appreciation (NUA). If you own company stock in your retirement plan and want to take advantage of preferred tax treatment, you need to move all of your money from the plan. Since the ins and outs of NUA will be the subject of a post at a later time, I will not elaborate here, except to say there are several points to be aware of, so please talk to someone who understands how NUA works before making a decision.

Why keep it in your old plan?

Simply put, if you have a good plan and you like the investment options there is no reason move unless the plan rules dictate that you have to move your money. Generally speaking, plans have lower costs than what you probably will pay in an IRA. 

Costs are not the only reason to consider staying put. ERISA plans have stronger bankruptcy protection than IRAs. If you are over 55 (or over 50 and a defined “safety” official) you may be able to avoid the 10% early withdrawal penalty.

Be aware of your plan’s rules if you have an outstanding loan. Many plans require repayment when you the leave the company, but some plans may allow for you to continue your payment plan. If you move your money then the loan will have to be paid back. Any amount you do not pay back will be taxed and penalized just like a withdrawal. 

Why move to your new plan?

If you are moving to a good plan and you like the investment options, roll your money into your new plan if you are allowed (plan rules may not allow all rollovers). Sounds familiar, right?

If you are able to take advantage of the “still working” exemption from required minimum distributions (RMDs), moving your old plan could make sense. I suggest you understand your new plan’s rules regarding “in-service” distributions in case you want access to your money.

Here is an idea if you need the cash. You need to know your plan’s loan rules first, but instead of taking a distribution roll your funds into the new plan and take loan. There are many plans that will not allow this, but if your plan does, it is probably better than paying the 10% early distribution penalty. 

This is only a general discussion of some of the reasons to consider when deciding what to do with your retirement account when you leave your employer. Depending on your situation, you might be well served to sit down with an adviser to evaluate your options taking your specific situation into account.