Rollovers

Rollovers

March 25, 2024

In today’s world, people tend to move between employers much more often than they did years ago. One reason is that Pension’s are much less common and have largely been replaced with Defined Contribution (401k, 403b etc.) retirement plans. These plans are an important tool in retirement and they are also quite portable. This post will explain how this works.

When someone switches employers, they have a few options for how to handle the retirement plan that is left with the previous employer. First, they can withdraw the money and spend it. For the sake of completeness, this is mentioned as an option, but it is never a good choice since these accounts are intended to be used for retirement and withdrawals would include penalties and taxes. The next option is to leave the account where it is. Many people do not feel comfortable doing this as it can make things more complicated for them with another account to remember, watch and manage. The last two options are typically the best. Rolling the account over into the new employer’s retirement plan or into an IRA. It is important to consider a few things with these options. First, does your new employer allow rollovers into their Plan? Some do and some do not, it is specific to each employer. Next, what are the fees and available investment options in your new employer’s Plan? These can also vary widely and important to understand. One of the many benefits of rolling funds into an IRA is that you will likely have more investment choices, including some lower cost options.

It is important to make sure that it is notated as a “Rollover” rather than a withdrawal which will save you a big headache at tax time. Also, be sure that you clearly identify which portion of your funds are pre-tax vs post tax and roll those funds over into the proper IRA (Traditional or Roth) respectively. Be extremely diligent when completing this process with your previous employer and loop in your financial advisor if needed.