If you’re changing jobs, getting ready to retire, or recently retired, you may be wondering what your options are with the funds in your workplace retirement plan, such as a 401(k), 403(b), or 457(b) accounts, and what you need to consider.
Before moving assets, be sure to consider all your options.1 Generally, you have four:
- Keeping your money in your former employer’s plan
- Rolling over your savings to an Individual Retirement Account (IRA)
- Rolling over into your new employer’s plan (if permitted by the new plan)
- Withdrawing your savings directly from the plan (which may incur taxes and IRS penalties, depending on your age)
There are reasons for leaving money within your workplace plan as well as rolling over your assets to an IRA or a new employer’s plan. You also may want to consider differences in investment options, services, fees and expenses, withdrawal options, required minimum distributions, other plan features, and tax treatment. You can speak with a TIAA Consultant and your tax advisor.
Leaving money in your current plan
Just because you’re leaving your job doesn’t mean you have to also walk away from your employer’s retirement plan. Some reasons for leaving your money in the plan may include:
- Investment fees: Both workplace retirement plans and IRAs charge investment- related fees and expenses. Workplace retirement plans may benefit from group buying power and thus charge lower investment fees than you would pay investing in an IRA.
- Investment options: Many workplace plans offer access to investment options such as stable value funds that are not typically available through IRAs.
In addition, many employer retirement plans offer clients access to investor advice, planning tools, educational materials and workshops.
Understanding of an IRA rollover
When you consolidate, or roll over, one or more retirement accounts, you move assets from your retirement plan to an IRA. Note that many types of retirement accounts, not just workplace plans, can be rolled over into an IRA. Advantages of an IRA rollover include:
- Investment options: IRAs may provide a greater variety of investment options than your workplace plan. Many employer plans limit the funds in which you can invest.
- Simplified investment planning. Consolidating workplace plans from multiple past employers into one IRA can provide you a view of all your retirement assets in one place. You may also have access to personalized money management and investment guidance.
Rolling over into a new employer plan
If you change jobs, you may decide to roll your retirement savings from your old workplace plan into your new employer’s plan, if your new employer allows it. This option offers some of the same benefits as the previous two:
- Adding existing assets to your new workplace plan can give you one account for all of your retirement assets
- You may have the ability to invest in plan- specific investment options.
Other advantages may include:
- Flexibility: If needed, you may be able to borrow money against your workplace plan. You may also be able to defer required minimum distributions (RMDs) if you are over age 70½ and still working.
What to consider
Your decision will depend on your own needs and circumstances. You should consider each of these questions when reviewing your choices:
- What are your investment options under your former or new retirement plan? Are you happy with the range of investment choices you have, or are you interested in a wider range of investments? If you don’t know what investment options you have under your current plan, check with your benefits office for more information.
- Are you invested in a retirement-plan annuity product that offers guaranteed income in retirement?2 How does it compare to an investment in another retirement plan or an IRA?
- What are the fees and expenses associated with a retirement plan compared to a rollover into an IRA? Will there be any surrender charges, penalties, or lost benefits (such as retiree healthcare) if you liquidate your employer plan assets? What are the expenses–such as sales loads, commissions, mutual fund expenses, and advisory fees–associated with an investment?
- What are the services available under your existing retirement plan compared to those available with a new retirement plan or an IRA?
- Are there any liquidity differences between your existing employer’s plan, an employer’s new plan or an IRA rollover?
- Are you able to make penalty-free withdrawals from your existing retirement plan, the new retirement plan or an IRA account? Of course, depending on the type of IRA, IRA withdrawals made prior to age 59½ are generally subject to ordinary income tax and a 10% penalty may apply. Speak with your tax advisor regarding your specific situation.
- Are you concerned about the level of protection of assets from creditors and legal judgments? Generally speaking, plan assets have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. State laws vary in the protection of IRA assets in lawsuits. You should consult with a lawyer or tax adviser for more information.
- What are required minimum distributions? When do they apply to you and what accounts require withdrawals? If they do apply, when do you need to take them?
- What is your overall investment portfolio? For example, if you hold a large quantity of employer stock, should you diversify your portfolio? And if that stock has appreciated, are there tax consequences of rolling over retirement plan assets into an IRA?