I recently read that the average American changes jobs 10 to 15 times over the course of his or her career (BLS Study).  That’s quite a few changes to navigate!  I often hear misconceptions about what to do with an employer-sponsored retirement plan after you leave a job.  Let’s myth-bust those misconceptions and get you on the right track to better decisions, shall we?

MYTH #1: “I have to cash out my old employer-sponsored retirement plan.”  FALSE.  Your former employer should contact you regarding the options specific to your plan, but in general, options may include:

  1. doing nothing (leaving your plan as-is);
  2. rolling your old plan into new employer’s plan (if the new plan allows this);
  3. rolling your old plan into a rollover IRA (more on that later);
  4. “cashing out” and using the cash for something else.

There are advantages and disadvantages to each option, of course, but the point is that you’ve got options, and cashing out is usually the last on the list.

Why would cashing out be last on the list?  For one thing, it’s the only option listed above which would constitute a taxable event to the IRS.  That means you could be subject to not only taxes, but also potentially tax penalties if you are under the age of 59 ½.  For the average taxpayer, that could mean a 35% bite out of your nest egg (assuming a 25% tax bracket and 10% penalty) when you cash out.  Do you know of any investment which will return you 35% annually?  I don’t.

OK, so you’re not cashing out.  In fact, you’re moving to a new employer with a new employer-sponsored retirement plan.  Great!  Before you consider rolling over your assets to the new plan, though, be sure to do your homework. First, you need to find out if your new employer plan even accepts rollovers (sometimes they don’t).  Then, specifically look at the fees and investment choices in the new employer plan.  Does the new plan have higher fees and/or more limited options?  You might consider leaving money in your old employer plan if it turns out to be a better deal (and if your old employer is not requiring you to move your money).  In that case, you could start contributing to the new employer plan to get your employer match (never leave “free money” on the table), without doing a rollover.  Of course, the danger there is to not forget about that old plan!  You’ll need to keep tabs on it – after all, it is still an investment in your future! – so make sure that is convenient enough that you’ll actually do it.

What about moving money to a rollover IRA?  The rollover IRA option was – and sometimes still is – the “knee-jerk reaction” taken by many advisors, but again, do your homework before assuming this is the way to go.  First off, get familiar with your employer match.  When do employer matching funds go into your account?  Sometimes employers match employee contributions at year-end, for example.  If you move your account before the match, you could miss out on “free money” that you were entitled to.  In that case, you may benefit from waiting until after the match has come in, and then consider moving your account.

Next, be sure you are familiar with the features of your old plan, like fees and investment choices, and compare them to the features of the new IRA (as discussed above).  In other words, shop for the best deal before you make the change (like any informed consumer would do!).  If you’re not sure what you are looking at, enlist the help of your HR Department, or a financial professional who is familiar with your specific job industry (there are subtleties to each industry that may be overlooked by a generalist).

Finally, if you do decide to go with the IRA rollover, make sure it is a properly requested “trustee-to-trustee” transfer and not a rollover check made payable to you.  This will help to preserve the special tax status of your retirement funds and prevent headaches with the IRS.

What if you decide to make the leap into running your own business, or becoming self-employed?  Congrats!  If this is completely new to you, the first thing you should do is seek a financial professional (ie, a CFP® practitioner or a CPA) who can help you structure this major change in a way that makes sense for your personal situation.  There are LOTS of great retirement plan options out there for the self-employed, from the SEP (Simplified Employee Pension) IRA to the SIMPLE (Savings Incentive Match Plan for Employees) IRA to the “Solo-K” (a 401k version for the self-employed).  The IRS has good introductory information about these plan types here: IRS Guide

And don’t forget the humble IRA/Roth IRA, of course.  Subject to income caps, you could potentially contribute to an IRA or a Roth IRA in addition to your self-employed plan.  The key to this is to have earned income of some sort.  (Again, you should consult with a knowledgeable professional).

I hope this little myth-bust will help you to make smarter financial choices when a job change happens to you or someone you know.  Just knowing a few key points can get you started in asking the right questions, which can make the difference between missed opportunities and a successful retirement.

I know this is a lot of information to digest.  Please, if you have any questions, feel free to reach out and contact me.  You may simply “reply” to this email, or give me a call at 888.434.1427.