Have you changed jobs in the past and now find yourself trying to manage multiple employer retirement plans, i.e., 401(k) or 403(b) accounts? If you answered yes, there are a few different options for what you can do with those old employer accounts. You will need to analyze a few factors which should help you be able to make a logical decision. We will start by going through three options we typically recommend to clients and end with some questions, which, based on the answers, could have a favorable or unfavorable impact on your decision.
Option #1: Keep your old employer plan and manage multiple retirement accounts
This option does require an account balance greater than $5,000, but if that is the case, there is no issue leaving it where it is.
Option #2: Rollover your old employer plan to your new employer plan
All else being equal, this is the better option because it consolidates your accounts and simplifies everything.
This choice gives you maximum flexibility and allows you to invest in the entire universe of investment choices. You will not be constrained to the plan investment options exclusively.
Questions to Consider:
Are the investment options at your old employer plan better or worse than your new employer plan?
If the options are significantly better i.e., quality, quantity, and diversification, and consolidation is not the top priority, leaving it alone makes sense. If both employer plans’ investment options are mediocre, Option #3 above might be your best choice.
Are fees at your old employer plan better or worse than your new employer plan?
You are paying certain fees for your employer plan, which you should limit as much as possible. Leaving your old employer plan where it is might increase the fees you are paying since you technically would have two employer retirement plans. Additionally, as part of the analysis, you should look at the investment options for each plan and the management fees associated with those investments. If fees are high for both employer plans, Option #3 might be your best choice.
Will a rollover to an IRA (individual retirement accounts) limit future Roth contributions?
There are many positives to doing a rollover to an IRA (Option #3) but there is also the potential of permanently disqualifying yourself from saving to a Roth IRA via a backdoor Roth contribution strategy. This is significantly important and can be extremely impactful if you are younger with many working years in front of you. To measure the impact of not being able to do a backdoor Roth contribution, the creation of an individual financial plan would be needed.
Does your income disqualify you from doing a Roth IRA contribution? If your income is not too high, this becomes a non-issue and Option #3 might be your best choice.
Do you already have significant dollars in an IRA? If this is true, doing a Rollover to an IRA will not change your position and Option #3 would make sense. If you do not have an existing IRA with significant dollars saved, Option #3 might not be the best choice as it will most likely disqualify you from doing a backdoor Roth contribution going forward. In that situation, Option #1 or Option #2 might be best.
Do you own any company stock in your retirement account?
If you own company stock, you could lose the opportunity to do a net unrealized appreciation “NUA” strategy. Usually, this only applies to employees who have worked at their current employer for a long time allowing them to accumulate shares that have a very low-cost basis relative to their value. Click here to read about the NUA in more detail.
Closing Thoughts:
The process of doing a rollover from an old employer to a new employer requires requesting a rollover form from your old employer. Most of the information needed to fill out the form is basic personal information, but you will need the account number for the account you plan to rollover the money before submitting the form to your new employer.
Doing a rollover correctly, either to a new employer plan (Option #2) or an IRA (Option #3), is a non-taxable event which will not have any negative tax consequences on your tax return.
There are pros and cons for each of the three recommended options. The best choice requires a holistic analysis of your situation to determine which option makes the most sense. Lastly, in many cases, the creation of an individual financial plan is necessary to determine the correct decision.
If you have questions and would like to talk with us further, please call us at 513-271-6777. For more THOR reading, click here to go to the Blogs and Market Updates section on our website.
