I’m Al Waller, your host of ClearPath – Your Roadmap to Health & Wealth SM.
Amid the pandemic, a new term has been coined and entered the American lexicon…the “Great Resignation.”
The pandemic’s upheaval has brought many changes to our work lives, including people opting to leave the workforce altogether. But at the same time, many people lost their jobs or opted to pursue new job opportunities altogether. Now with these job shifts comes the decision of what to do with your 401(k) plan savings when you leave your job.
Here to help us understand and navigate the possible choices – along with their implications – is Catherine Collinson, CEO and president of nonprofit Transamerica Institute®.
So, Catherine, what options are out there for people who have recently left a company where they’ve had savings in either a 401(k) or similar plan?
Catherine Collinson: Hi Al. It’s great to be here and to answer your question. In a nutshell, there are essentially four options.
- Keep your 401(k) savings with your former employer, if permitted.
- Roll the savings over into an individual retirement account or IRA.
- Roll the savings over into your new employer’s 401(k), if they have one and it’s allowable.
- Or —and I highly recommend AGAINST this— you can cash out the account and be subject to income taxes and a possible 10% penalty fee if you are under age 59½.
Al Waller: Well, that sounds pretty straight-forward, but I’m willing to bet there’s probably more here than meets the eye — say for instance, certain risks and benefits that would apply to each of them, right?
And if so, then how does someone go about deciding which option works best for them?
Catherine Collinson: Great question, Al, and this is right in the spirit of what we talk about often on the show. You've got to do your homework. Each of these options can work, even though I recommend against cashing out your balance. But there are a number of considerations and trade-offs. So again, I repeat I recommend against cashing out your account.
With that, let's do this together. Let's break down the options, what to look for, what to think about, and how they work. I'm going to jump right in.
Let's look at option number one and that is leaving your retirement savings in the plan at your former employer. This could especially work if you're happy with available investments, services offered, and associated fees. And this is in some ways (or could be) the path of least resistance. However, there are considerations.
If you do that, once you leave your employer, you'll no longer be able to contribute to the plan. Another thing is…and this is going to sound so obvious, but a lot of people kind of miss the boat on this. You have to stay in contact with your former employer’s retirement plan provider. Know their website and/or their 1-800 number because you're going to want to check on your savings from time to time. If you move, you're going to want to update your contact information, or if you have a life change – maybe you get married or divorced or have a family, you want to update your beneficiary designation.
So, there are some advantages to leaving it in the plan, but it doesn't get you off the hook in terms of maintaining your account. That's really important to remember.
Al, you're not going to believe this. In the retirement services industry, there's actually a phenomenon that's referred to as “orphans”. And who are orphans? These are people that leave their employer. They leave their balance in the plan and then they don't update their contact information, then that retirement plan provider needs to reach them and has no way of doing so because there could be changes to the plan, changes to the investments, or maybe even a new record keeper. If you do go this route, don't be an orphan. Keep your information up to date and keep on top of those savings.
Al Waller: I think I would want to be keeping that money in the family and not leaving it on the table. Like they say, nobody cares more about your money than you. So, you really should be taking an active role in terms of the next step there.
Now, let’s talk about that second option. What about opening an IRA – what can you tell us about that?
Catherine Collinson: Well, the lingo is opening what's called a rollover IRA. How that works is you open the account with a financial services provider. It could be your bank or credit union or other financial services provider (if they offer such things as rollover IRAs) and then working to transfer the money from your former employer's plan into this new rollover IRA account.
One of the considerations is maybe you have your savings all with a financial institution and rolling it over could just make it easier to keep track of all of your accounts. That's one reason to do it. Other possible reasons, once you've done your homework of course, is looking at the available investments, services offered, and the fees so you really understand what the tradeoffs are and can make a decision that's best for you.
Comparison shopping is really important both from an ease of use, as well the overall cost of the IRA rollover because that could impact the growth of your savings over the long haul. We all know we're going to need those retirement savings when that day comes that we’re no longer working.
Al Waller: Yes, as a matter of fact I remember going through that drill myself and to your point, it definitely does makes sense – because there are other options and costs associated – to do your research and be thorough about it up front.
As for the third option, you mentioned moving money from your former employer’s plan to your new employer’s plan. Now that sounds like that might be complicated. Is it?
Catherine Collinson: Well, surprisingly it's not complicated but there are a couple of major caveats.
First of all, your new employer has to offer a plan so that you can roll it from your former employer's plan to your new employer's plan. And secondly, your new employer's plan has to allow rollovers in. Many plans allow this, but there are some that do not.
So, with those caveats it may be easier than you think and it's another way to help you keep your retirement savings in one place assuming you're going to start contributing to your new employer's plan. But again, do your homework and get a good understanding of the fees, investments and services offered.
Al Waller: Excellent. That really simplifies the process.
Now, let’s just say someone wants to pursue opening an IRA or transferring their savings into their new employer’s plan. Now, how do they go about doing that?
Catherine Collinson: Not surprising, it involves doing some paperwork. This could be old school hard copy paper forms, or some can be affected online through the retirement plan provider’s website. What to ask for is called a direct rollover from your former employer's retirement plan provider. In this scenario, they will transfer the funds from your account there into the new account, whether it's at your new employer or whether it's a rollover IRA at a financial services institution. So, they will transfer the funds from point A to B. You will not be a recipient or middle person amid that transfer.
Of course, one of the really important pieces of information your former employer needs to know in order to help affect that transfer is where the money is going. So, you will have to open the new account and have that new account information, so your former employer’s retirement plan provider knows where to send it.
Al Waller: Well, that makes a lot of sense and sounds pretty straightforward too.
Now, let’s talk about the 4th and final option, cashing out the account and using the money. I mean, let’s face it, unfortunately there are a lot of people out there having financial difficulties as the pandemic continues to drag on, but as you referenced earlier, there may be some serious ramifications to this approach, right?
Catherine Collinson: There are, and we do want to be very mindful that so many people have fallen on some hard times over the course of the pandemic and may need the money.
My thought process is explore all options. This may very well be your best option but again, it starts with doing your homework. If you do find that you need to cash out your savings, a tip is this…a tip or a question… Do you need to cash out all of it or can you roll the funds over into an IRA and then take a withdrawal of only what you need?
That way the balance that remains in the retirement account has the ability to continue to grow. You're not depleting the entirety of your retirement savings, and also, you’re somewhat mitigating the impact of the income taxes and possible 10% penalty if you’re under age 59 ½.
So, I guess the bottom line is you don't need to think of it as an all or nothing proposition. There are ways that if you really need the money, you can do a partial withdrawal without doing a total withdrawal. Then those funds that remain can continue to grow.
One important point though is as you do your homework and weigh the alternatives, even though as a retirement researcher and enthusiast, I am passionate about retirement savings, there are situations where taking the withdrawals is the best possible option, especially if you're weighing it against things like taking on high interest rate credit card debt which can be a really big hole to dig oneself out of.
Al Waller: Well, that makes a lot of sense, and hopefully you’re not backed into a corner like that because it doesn’t sound like there is a whole lot to recommend. But sometimes you have to do what you have to do.
Now are there any other methods or actions people should take into consideration within this vein?
Catherine Collinson: There are always more considerations, and this one has to do with account balances that are under $5,000. This falls in the category of things you need to know.
As we talked about option number one, leaving your savings in your former employer’s plan, you can do that generally if your account balance is more than $5,000 and you don't even need to give any instructions to move the money. It will just stay in the plan.
However, there are a couple other scenarios if your balance is less than $5,000. For example, if your balance is less than $1,000, your plan provider can automatically cash you out and send you a check. So that's something to be mindful of. You would need to take action to avoid that from happening.
For balances between $1,000-$5,000, plan providers can automatically move your savings from your employer's plan to a rollover IRA if you don't give any instructions to do something else. This is really important to flag because if this does happen, you're going to need to get information about the new IRA provider and keep track of this account. As we talked about, you don't want to become an orphan or at least your retirement savings to become orphaned. So, it's really important to keep track of where those savings might go. And again, that scenario is if your account balance is between $1,000 and $5,000.
Al Waller: Good advice Catherine. Now, before we sign off, could you recap by just running through those four options again?
Catherine Collinson: Great, here are all four of them one more time.
- Keep your savings in your former employer’s 401(k) or similar plan.
- Move the savings into a rollover IRA.
- Roll your savings into your new employer’s 401(k) if they offer a 401(k) and allow rollovers in.
- Cash out the account and pay applicable taxes and potential 10% penalty.
Al Waller: Well Catherine, thanks again for joining us today and for your timely insight on this topic.
This should really go a long way in helping our listeners understand what to do with their retirement savings if and when they decide to leave their job.
ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about retirement security and the intersections of health and financial well-being. You can find our weekly podcast on WYPR’s Podcast Central and mobile app, wherever you get your podcasts, and at transamericainstitute.org.
And we hope you’ll join us and listen to future episodes where we offer additional retirement planning insights.
Until the next time, I’m your host, Al Waller. Stay safe, be well, and thanks for listening.
Clearpath is produced by the Transamerica Institute with assistance from WYPR.
