Leaving retirement money where it is can make sense, especially if your old plan has good investment choices and low costs. But it’s not the only way to go—nor is it always the best plan.
You generally have four options for retirement accounts still sitting where you used to work:
- Leave the funds where they are
- Roll over to an IRA
- Roll over to a new workplace plan
- Cash out (take the money and run)
Here’s a closer look at each.
Leave the funds where they are
Leaving retirement money in your old plan—assuming you’re allowed to—could cut down on potential administrative headaches. Also, the account can maintain its potential to grow tax deferred, and you can usually change investments as you see fit.
Even so, you won’t be able to contribute more money to the account. Maybe worse: You run the risk of forgetting about it. After all, out of sight can often mean out of mind. As a result, you might not be managing investments that could be critical to your future in the best way; the portfolio you carefully designed in your 20s or 30s may no longer match your risk profile or time horizon.
Remember, regardless of your decisions, you should monitor your accounts at least annually to ensure they continue to meet your objectives.
Roll over to an IRA
A rollover allows you to take the money in your retirement plan and move it to an individual retirement account (IRA). One advantage is that you could have access to a far wider range of investments. This includes individual stocks and possibly alternative investments if you opt for a self-directed IRA (SDIRA).
If the retirement plan you leave only has a narrow range of choices and their investments carry a high price tag, consider rolling over. Additionally, think about rolling over if you have ongoing account expenses and fees.
There are multiple upsides to a rollover:
- It’s easier to keep track of your money. All your assets are under one roof. This also means...
- You can use a big-picture investment strategy. Bringing all of your accounts together, a.k.a. consolidation, helps you invest with your entire portfolio in mind. This lets you avoid deciding what investments to hold in different accounts. Instead, you can choose and maintain an asset allocation—how much you want in stocks, bonds and other asset classes—across all of your retirement money.
- You could access alternative investments. Workplace plans usually have a limited menu of investment options, often built around “target-date” funds (TDFs)—mixes of stocks and bonds that grow more conservative as the target (typically the year you expect to retire) approaches. While a TDF may be fine for you, know that different fund providers take different approaches to risk—and theirs might not match up with yours. Also, TDFs are meant to be be all-in-one solutions; mixing one TDF with other investments can mess up your overall strategy. By contrast, a rollover could open up more fund options (including TDFs) at a brokerage firm. You can even buy individual stocks or alternative assets like real estate or private investments if you open an SDIRA.
- It may cost less. Rolling the money into an IRA may give you access to lower-cost methods of saving.
If you roll over to an IRA, decide between a “traditional” tax-deferred account and an after-tax Roth account. With a traditional rollover IRA, you pay no tax on the money until you withdraw it. With a Roth, you pay taxes upfront, but you can grow and withdraw your money tax free down the road. (If you’re rolling over from a Roth 401(k), 403(b) or 457, sticking with a Roth makes sense.)
Also, consider a “direct” rollover Opens in new window—straight from your old plan to the IRA. If that’s not doable or you want more control over the process, you can have a check made out to the IRA provider for your benefit (“FBO your name”) and sent to you, after which you’ll have 60 days to deposit it into a qualified account. Otherwise, you’ll owe income taxes and potential penalties.
Further, if you get a check made out to you, you’ll still have that 60-day window to deposit the money into an IRA—but your former organization will be required to withhold 20% for federal income tax. (To continue deferring taxes on the money in the account, you’d need to make up that amount on your own.)