Take Your Retirement with You When You Leave a Company

  by Shelley Seagler

The two largest assets held by most people are their home and their employer-sponsored retirement plan. While many retirees have held the same job for life, total workplace turnover hit an all-time high of 19.3% in the United States last year. Employees that are changing jobs should take their retirement savings with them to avoid any problems down the road.

Let’s take a look at the three most popular types of retirement plans and how you can take them with you to a new job or, even better, roll them over into your own account.

Types of Employer Plans

Employer-sponsored retirement plans are designed to help employees save for retirement, while providing employers with tax benefits and recruiting leverage. Since these plans typically have an employer match, they tend to be a better choice for individuals than maintaining individual retirement accounts, such as traditional or Roth IRAs.

There are three common types of retirement plans:

  • Traditional Benefit Plans: These plans, also known as defined benefit pension plans, were common until the 1970s. They provide employees with fixed monthly benefits in retirement with no responsibilities to contribute to the plan out of their own paycheck each month.
  • 401K & Roth 401K Plans: These plans are primarily funded by the employee, but come with at least a partial employer match. Traditional 401K plans enable employees to deduct contributions from their taxes, whereas Roth 401K plans enable employees to withdraw money tax-free in retirement.
  • SIMPLE & SEP-IRA Plans: These plans are primarily designed for small businesses that don’t have enough people, time or money to set up complex retirement plans. They are similar to their IRA counterparts, but have larger contribution limits each year.

In some cases, you may want to fine-tune how much you contribute to an employer-sponsored retirement plan. A high-cost plan with a maximum employer match might only be worth contributing to up to the matched amount. After that, you can contribute to a separate Traditional or Roth IRA that involves less ongoing cost and more investment options.

Consider speaking with a financial advisor to compare various options and find the best allocations to meet your overall financial goals.

Direct IRA Rollovers

You can easily move funds from one retirement plan to another using a rollover. Often times, rollovers occur when an employee changes jobs and needs to move their retirement assets from their old employer to their new employer. You can also make a rollover for tax reasons (e.g. a 401K to a Roth IRA) or for cost reasons (e.g. a 401K to a non-employer IRA).

Download our free Checklist of Retirement Savings Tips to ensure that you’re maximizing your savings by paying the lowest fees and least tax.

Employer-sponsored 401K and Roth 401K plans can be rolled over into either a traditional IRA, Roth IRA or another employer-sponsored 401K or Roth 401K without incurring taxes or early withdrawal penalties. Since there are so many options, you may want to talk with a financial advisor to determine the optimal decision for your specific situation.

Direct rollovers are the most common type of rollover. The process involves contacting your former plan administrator and requesting that they make a payment directly to another retirement plan. Since you’re not taking possession of the funds, no taxes are withheld from the transfer amount. Since each company plan is unique, they will all have their own specific paperwork required to complete a rollover. In most cases, you just need to know the custodian (broker), account number, and mailing address for your new firm to complete the process.

Direct IRA Rollover

IRS Rollover Chart – Source: IRS

While the one-rollover-per-year rule prohibits more than one rollover per year, direct rollovers don’t count. This rule only applies in situations where you take possession of the funds. If done correctly, your money should always go from one custodian to the next.

Other Considerations

There are a few factors that could influence direct rollovers that you should be aware of before starting the process. If any of these cases apply to you, it’s important to speak with a financial advisor or accountant to discuss the best options to minimize your tax obligations and/or overall investment fees, as well as avoid any issues with the IRS.

Don’t forget to download our free Checklist of Retirement Savings Tips to ensure that you’re maximizing your savings by paying the lowest fees and least tax.

The most important considerations include:

  • In most cases, your best bet is to do a direct rollover from old plans into a self-directed IRA or Roth IRA. This gives you the most control with nearly unlimited investment options. You are no longer restricted by plan rules and investment costs are completely under your control.
  • In rare cases, it may be smarter to move the funds into your new company’s employer-sponsored retirement plan. The most common reasons include greater creditor protection and different RMD rules. Keep in mind, plans aren’t required to accept rollover contributions, which means it’s important to check with the new plan administrator to find out if they’re allowed, and if so, what type of contributions are allowed.
  • If you are no longer an employee and your plan is worth between $1,000 and $5,000, the plan administrator may deposit the money into an IRA in your name if you don’t elect to receive the money or roll it over. If your plan is less than $1,000, they may pay it to you less tax withholdings.
  • Do everything that you can to avoid taking possession of the funds. When old plans mail a check, it should be made out to the new firm “FBO Your Name”, not directly to you. This will help you avoid unnecessary withholding tax and headaches at tax time.

For more information about these and other unique situations, read the IRS’ Rollovers of Retirement Plan and IRA Distributions FAQ.

Once you enter retirement, you may want to consider a direct IRA rollover into an individual account to gain control over your investment strategies. You can then use techniques like the Snider Investment Method to generate an income from stocks rather than relying exclusively on low-yielding fixed-income investments or certificates of deposit.

The Snider Investment Method teaches you how to generate an income using stock options. By selling someone else the right to shares that you own, you can collect the premium payments and only commit to selling at a higher price. You can keep the stock and the premiums if the stock doesn’t reach the strike price and sell more options next month.

Sign up for our free course to learn more about the Snider Investment Method and how it can help you!

The Bottom Line

Employee turnover is on the rise and many employees are leaving their retirement plans at the door. Rather than starting over each time, it’s important to institute a direct rollover to either a new employer-sponsored retirement account or an individual IRA. That way, you can better accumulate assets and avoid any unexpected headaches that may arise.

If you are already entering retirement, you may want to consider rolling over into a self-directed IRA and using income strategies, like the Snider Investment Method, to boost your income. You can realize many of the benefits of stock ownership without sacrificing the regular income that you need during retirement!

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