When it comes to your former employer’s retirement plan, you may be asking yourself the same question that The Clash posed back in the 80s: Should I stay or should I go?
Many people tell us they “have to” roll over their plan account because they left a job or were laid off. But let’s set the record straight: Rolling over your account from your previous employer’s plan may not always be necessary.
Retirement investors have options. One is rolling over your account into a new employer’s plan or an individual retirement account (IRA). However, many employers let you leave your account parked where it is. Be sure to check if this option is available to you before making your decision.
The traditional thinking is that rolling over an account from a previous employer’s plan can help you avoid paying multiple fees. People also believe that it can help streamline retirement savings and keep you from losing track of your money (which happens more often than you’d think!).
Let’s go over the basics of each option.
First things first: Don’t cash it out.
A 2009 study showed that when changing jobs, nearly half (46%) of employees cashed out their account rather than roll it into their new employer’s plan or a low-cost IRA.1 If you’re younger than 59½ and make this mistake, you may end up paying a 10% early withdrawal penalty and could be subject to additional taxes as well.2
Plus, if you withdraw early, you’ll miss out on compound returns. These returns happen when the interest you’ve earned is added to your initial investment. It’s a driving force that helps your money grow over time. If you cash out your account now, you’ll have to play catch-up later.
Is rolling over into an IRA right for you?
A low-cost IRA might be a good option — but the key word here is “low-cost.” Fees associated with IRAs can be high and aren’t always clearly explained. This situation is so common that in 2013, the Financial Industry Regulatory Authority issued a formal notice stating broker-dealers often don’t disclose all IRA fees.3
The bottom line on IRAs is to watch for hidden fees. If you’re considering rolling an account into an IRA, compare the fees you’re paying on your current account to the total fees you’d pay on a new IRA.
Should you stay or should you go?
Like almost anything, it depends on you and your unique financial situation — as well as the options that your previous employer’s plan offers you. You can leave your retirement savings right where it is or roll it over into another account that makes more sense for you. Just make sure you have the facts on fees and know the full financial impact of your decision.
1 (2009, October 28). Hewitt Study Shows Nearly Half of U.S. Employees Cash Out Their 401(k) Accounts When Leaving Their Jobs. BusinessWire. Retrieved July 12, 2018, from http://www.businesswire.com/news/home/20091028005144/en/Hewitt-Study-Shows-U.S.-Employees-Cash-401.
2 (2018, Mar. 15). Things to Remember when Considering Early Withdrawals from Retirement Plans. IRS.gov. Retrieved July 12, 2018, from https://www.irs.gov/newsroom/things-to-remember-when-considering-early-withdrawals-from-retirement-plans.
3 (2013 July). Regulatory Notice. Brokerage and Individual Retirement Account Fees. FINRA.org. Retrieved July 12, 2018 from, http://www.finra.org/sites/default/files/NoticeDocument/p304670.pdf.