If you’ve changed jobs multiple times throughout your career, you’re not alone. According to the Bureau of Labor Statistics, baby boomers switched employers, on average, 12 times between ages 18 and 54.1
A new job might come with enticing perks, like raises, promotions, or a chance to grow your skills. If you were putting money aside in your former employer’s retirement plan, however, it also means figuring out what to do with your savings now that you’re working for a new employer. And if you’ve had a few jobs, you may have several retirement savings accounts in different places. (Calculator: How much for retirement will I need?)
So what do you do with them? Well, you have a few options. You can:
- Cash out your old account(s) and take the money.
- Leave the money where it is.
- Roll it over to an individual retirement account (IRA).
- Roll it over to your new employer’s retirement plan.
Option 1: Cash it out
It might be tempting to take the money and run, but there are consequences to doing so, including hefty taxes. Twenty percent of your savings automatically goes to Uncle Sam for federal taxes; you’ll receive a check for the remaining 80 percent. If you’re under age 59½, you’ll also get hit with a 10 percent early withdrawal tax.
Also, if you cash out your existing retirement savings when you switch jobs, you’re more likely to spend it, which means you’ll have to start saving for retirement all over again. You worked hard to save that money for your future, so why not let it continue to work for you so you can enjoy it when you retire?
Option 2: Leave it alone
Another option is to simply leave the money in your old employer’s retirement plan. It certainly seems like the easiest choice, right? No paperwork, no taxes, and perhaps you’re already comfortable with the plan’s investment options.
That’s all good, but here’s the downside: since you’re no longer employed there, it’s easy to lose touch with what’s going on with the retirement plan. Your former employer could change investment funds or plan providers, and as a result, their plan may no longer be a good fit with your needs and goals. Plus, it can be difficult to keep track of a bunch of different accounts, web passwords, and maintain up-to-date contact information with several former employers, especially if you’ve moved around a lot.
Option 3: Roll it over to an IRA
Another option to consider is to move your retirement savings to an IRA. The upside of this move is that you still enjoy the benefit of tax-deferred growth of your investments and have direct control over the account.
However, there are some disadvantages to consider:
- The fees for individual products may be more expensive than a group plan.
- No oversight on investments, unless you hire a financial professional.
- You must make Required Minimum Distributions from the account beginning at age 72, even if you’re still working.
- You can’t easily borrow money from your IRA.
Option 4: Consolidate it into your new employer’s plan
You may also have the option of rolling your balance from your old employer’s retirement plan into your new employer’s plan.
A key benefit of rollovers is they allow you to consolidate retirement plan assets into a single account. The biggest upside to consolidating is it simplifies your financial life. Imagine no longer needing to update contact information or keep track of multiple accounts in different locations, not to mention piles of paperwork, different investment funds, tax forms and passwords.
Here are some reasons why it might be a good option to roll your retirement savings into your new employer’s plan:
- You avoid the Required Minimum Distributions from the account at age 72 if you’re still working for that employer.
- Your employer is responsible for managing the plan and offering investment options that are prudent and have reasonable fees.
- Having all of your retirement savings in a single account means you only have one investment mix to manage. That will make it easier for you to coordinate your investment selections and make sure they work together to grow your account balance.
- Consolidating your accounts may also help you save money by reducing investment and account management fees.
- You can plan more effectively for the future by having your entire savings and investment portfolio all in one place.
- Combining your accounts can simplify retirement income planning when it comes time to access your savings.
- Finally, consolidating makes things easier on your beneficiaries in the event you pass away or become physically or mentally unable to manage your investments.
What is a direct rollover?
A direct rollover, where your former employer sends a check directly to your new employer, is the safest way to avoid any tax consequences when you’re moving money between retirement plans. Be sure to check with the Human Resources (HR) departments at both your old and new employers for the appropriate rollover paperwork and procedures.
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1 U.S. Bureau of Labor Statistics, “Number of Jobs, Labor Market Experience, Marital Status, and Health: Results from a National Longitudinal Survey,” August 2021.
Investors should consider the impact of transfer fees, the loss of vested benefits and/ or surrender charges that may be imposed by their current plan when funds are consolidated.