Retirement money in ex-employer’s plan? Here is what you need to know


Written by Vid Ponnapalli, MS, CFP®, EA

Vid Ponnapalli is a Fee-Only financial advisor providing Customized Financial Planning, Investment Management, and Tax Services for Busy Professionals in New Jersey, New York City, and across the country.

December 8, 2015

When changing jobs from one employer to another, I heard from many a simple question: What should I do with the qualified (tax-deferred) money that is in a plan sponsored by ex-employer? What are my options? While choosing the exact option depends on individual circumstances, knowledge of the four typical options listed below will guide you through making the decision.

  • Request a lump sum distribution of the funds from your ex-employer’s plan,
  • Take no action and leave the funds in your ex-employer’s plan (if allowed),
  • Transfer the funds to a new employer’s plan if your new employer offers a plan, and if your new employer’s plan allows funds to be rolled into,
  • Transfer the funds, directly or indirectly, to an individual IRA owned by you.

Option 1: Request a lump sum distribution

Taking a lump sum distribution gives you cash in hand immediately, but may not be ideal due to income tax implications and possible penalties due to the distribution before retirement age. However, there is one situation where taking such a distribution could indeed benefit you financially. One of my previous posts “Is taking lump distribution always bad?”, articulates the pros and cons of taking such a distribution.

Option 2: Leave it with in previous employer’s plan (Do nothing option)

If allowed, leaving funds in your ex-employer’s plan lets you continue tax-deferred growth for your savings. Typical employer plans allow you to continue in the plan unless your accumulated funds in the plan are less than $5,000. If your funds are less than $5,000, the plan could force you to rollover the funds. Accordingly, you have the decision to make if your accumulated funds are more than $5,000.

Fundamentally, leaving retirement funds in an employer-sponsored plan has the disadvantage that you are bound to the investment choices in the plan. A second concern to leave funds in ex-employer’s plan arises when the plan rules limit investment choices to ex-employees, or charge higher fees for non-employees. For these reasons, unless you believe your ex-employer’s plan is a great plan with several low-cost Investment options that you like, it is always a good idea to consider other options.

Option 3: Rollover to your new employer’s plan

In order to roll over funds from your ex-employer’s plan to your new employer’s plan, two conditions should be satisfied. 1) Your new employer should offer a qualified plan, and 2) Your new employer’s plan should allow you to rollover your tax-deferred funds from your ex-employer’s plan.

When these two conditions are satisfied, you will be able to roll over, enjoy the benefits of tax-deferred growth, consolidate your savings at one place, and perhaps gain access to a higher loan amount from the plan ( if your new employer’s plan offers loans). However, rolling over funds to your new employer’s plan suffers from the same fundamental disadvantage of limited Investment options. You may further be subjected to new employer’s plan rules, which may have higher costs and certain transaction limits.

Option 4: Rollover to an IRA

Rolling over to an IRA gives you the greatest control of where and how you Invest the funds. This is a great benefit if you want to take advantage of low-cost ETF investing or invest in products allowed in IRAs, but usually not allowed in employer-sponsored plans. In addition, rolling over to an IRA allows you to continue the tax-deferred growth of your funds, and lets you consolidate your retirement funds with any other IRA funds you may previously have. Lastly, rolling over to IRA enjoys the benefit of penalty-free withdrawals for qualifying first-time home purchase or qualified education expenses if you are under retirement age 59½.

However, due to loss of employer oversight (ERISA and fiduciary protections), IRA assets have less protection from federal law as compared to the assets in employer qualified plans. Secondly, Investing IRA assets require you to have the time, skill and interest to manage your portfolio or seek professional help to do so.

So, what you think? Do you have funds stuck in a previous employer’s qualified plan and want to explore your options?  Schedule an appointment with me, and I will be glad to advise.

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