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What should you do with a retirement plan from a previous employer?


Options include rolling it over into your new employer’s plan or into an IRA.

Jeff Witz, CFP

Jeff Witz, CFP

Have you changed employers but still have a 401(k), 403(b), or other employer-sponsored retirement plan through them? It may not be the best idea to leave it there for good. Over time, employers can change names, be acquired, or simply go out of business. Although this doesn’t mean you will lose this account for good, it can become more difficult to track down.

In general, it is recommended that you consolidate retirement accounts as best you can while also taking into consideration costs and investment options. The process of consolidating retirement assets often involves a rollover, but this isn’t your only option. What follows is a review of what you can do with former employer–sponsored retirement plans.

Four options to consider

Generally, you have 4 options when it comes to your old plans:

1. You may be able to leave it with the old employer.

2. You can roll it into your new employer’s retirement plan (if eligible).

3. You can roll the money into an individual retirement account (IRA).

4. You can take a cash distribution.

Each of these alternatives has advantages and disadvantages.

For many individuals, taking a cash distribution is the least desirable option because any distributed amount not rolled into a new plan will be subject to income taxes and a 10% penalty if you are younger than 59½ years. The taxable portion will be counted as ordinary income during the year of distribution and could result in moving you into a higher tax bracket. Due to the severity of the taxes and penalty, cash distributions should only be considered in cases of true financial hardship such as foreclosure, eviction, or repossession.

If the plan permits, leaving the retirement account with your former employer has some advantages, such as familiar investment options and possibly lower fees. Additionally, if it is a qualified retirement plan, it may offer protection from malpractice lawsuits and other creditors. Before making the asset protection feature a deciding factor, check whether your new employer plan offers the same protections. Many of them do.

It may make more sense to roll the funds into the qualified retirement plan provided by your new employer or into a rollover IRA. Retirement assets left with previous employers can be forgotten (yes, it happens!), or the previous employer may change names or be acquired down the road. This can make tracking down these old plans very difficult and time-consuming. Therefore, consolidating your retirement accounts through a rollover may be the better option. It simplifies the management of your retirement savings by combining multiple accounts into just one or two.

When deciding whether to roll your account(s) into your new employer’s plan or an IRA, it is important to examine the differences between the 2 vehicles. Both will maintain the tax benefits of the previous account, and no taxes or penalties are incurred by moving the funds. The biggest difference between the 2 account types is the available investment options. Your new employer’s plan may only offer a limited selection of investment options. The number of funds could range from fewer than 10 investment options to dozens. These funds may have a history of strong performance with low fees, or they may not. It is important to review the options before committing to rolling the funds into that plan. An IRA rollover, on the other hand, allows you to invest in any publicly traded security, so you may be able to find better-performing funds that have lower internal expense ratios.

Another difference between the 2 rollover options is the cost. When using your employer’s retirement plan, the cost may be assumed by the employer. This includes paying a recordkeeper, a third-party administrator, and often an investment adviser. The employee just needs to pay the internal expense ratio of the investments themselves. With an IRA rollover, the responsibility of paying an investment adviser for assistance in managing the account may fall to you. If you do not have extensive experience selecting funds and designing an investment allocation, working with an adviser is recommended. Most advisers charge a fee for their services, and that should be factored into your decision.

Due to the complexity of each option and the consequences involved, we recommend speaking with a financial adviser to determine the best option for you.

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Effective June 21, 2005, newly issued Internal Revenue Service regulations require that certain types of written advice include a disclaimer. To the extent the preceding message contains written advice relating to a Federal tax issue, the written advice is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer, for the purposes of avoiding Federal tax penalties, and was not written to support the promotion or marketing of the transaction or matters discussed herein.

The information contained in this report is for informational purposes only. Any calculations have been made using techniques we consider reliable but are not guaranteed. Please contact your tax advisor to review this information and to consult with them regarding any questions you may have with respect to this communication.

MEDIQUS Asset Advisors, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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