When you leave a company, either voluntarily or not, there are usually a few different options for your retirement savings. And remember, any money that you’ve contributed to the plan over the years belongs to you. Any matching contributions made for you on behalf of your employer, may or may not belong to you. If you’ve met the vesting requirement, if there are any, then the contributions belong to you. If not, then perhaps they don’t. But contributions you have made or deferrals from your pay that went into the plan belong to you.
Your first option is to cash it in. Which is not really recommended unless you need the money. And depending upon your age and circumstances, cashing in may cause a taxable event and/or IRS penalty.
Another option may be to leave the money in your old plan. Sometimes this is allowed, sometimes not. Once you’ve left an employer, they generally would like you to take your retirement savings with you because it costs them money to maintain you in the plan and is also a liability risk for them. They will politely say, “thanks for stopping by, but now that you no longer work here, please do something with your company retirement plan.” And, since you don’t work there any longer, you cannot continue making contributions. And most of the time, the investment options in your existing plan are limited and once you are no longer active, you may not be able to make investment or allocation changes. Of course, these rules do not apply to every employer plan.
Sometimes you can move the assets to the plan at your new employer, sometimes not. Most employer sponsored plans, like the one at your new job, will allow rollovers from previous plans. Which might be a good idea if you like the new plan and the investments in the new plan. But what if the new plan isn’t as robust as the previous one? Or what if your new employer doesn’t offer a retirement plan?
And finally, you have the option of doing an IRA rollover. In which case you take the assets from the previous employer plan and move them into an IRA, or individual retirement account. Doing so is a non-taxable event as long as you don’t take a distribution along the way and an IRA often gives you more options on how to invest the account. Where a company sponsored plan, even the larger ones, may offer a dozen or two investment alternatives, an IRA is virtually unlimited and can be customized to your personal objectives and risk tolerance rather than lumping you in with everyone else in the plan.
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Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of the FINRA website for additional information. An IRA rollover may not be right for everyone