After a few years into your professional life and/or career you may realize that you have worked at one, two, or even more companies! Many of those offered you an opportunity to participate in a company retirement plan and we hope you did! According to the Bureau of Labor Statistics, people born in the early 1980’s will have held an average of 8.2 jobs between the ages of 18 to 32. That’s a lot of company retirement plans that might be abandoned! Not many people know what they should be doing with these previous employer retirement plans so we will walk you through your options.
There are generally three things you can do with a previous employer retirement plan.
Option 1: You can move the previous employer retirement plan to your new employer plan if allowed by the new plan.
Option 2: You can move the previous employer plan into a “rollover IRA” and have it professionally managed or you can manage it yourself.
Option 3: You can leave it where it is if the previous plan allows you to do so.
Each of these options has benefits and potential drawbacks to consider. We’ve outlined some of those below.
This can be very beneficial if your new plan offers high quality, low-cost investment options within the plan. It allows you to consolidate your retirement money into one place making it easier to monitor. Sometimes you aren’t allowed to combine the assets but it’s an easy question to ask your new employer (likely your Human Resources department). In most cases, this would be what we recommend if you’ve got a high-quality plan.
This can be a good option if your previous employer plan (1) requires you to move your account (2) charges an administration fee that they previously covered while you were an employee of the company (3) they don’t have high quality, low-cost investment options. (4) your new employer will not allow you to consolidate to their plan. With a Rollover IRA, however, you will have increased flexibility around investment choices. If you go this route you may no longer be eligible to convert future non-deductible IRA contributions to a Roth IRA without incurring a tax liability. Please contact your advisor to find out if this applies to you and click here to learn more about this process.
If there is no administration fee, the plan has great investment options, and you are allowed to leave it where it is, you are welcome to do this! However, consolidating is helpful so you don’t have money in several different places.
None of the options above should have tax consequences as long as the funds are moved from one retirement account to another retirement account in a timely fashion (we detail those timeline). It’s important to evaluate what is right for you personally and the long term consequences of each decision so your retirement savings are invested in the most cost-efficient and convenient manner.
How do I actually move my money?
If you’ve decided to move forward with options 1 or 2 the process to consolidate your retirement plan isn’t always simple. Here are some guidelines to help you navigate the complicated world of moving your previous employer plan.
Unfortunately, the company retirement plan space hasn't quite adjusted to the new technology age and therefore the process can be slow and may require many steps.
Before you get started, please note that these are simply guidelines as every plan provider may have a different process. This should apply to most transfers, however. When you begin you will likely hear the word "rollover" said frequently. This simply means that you are "rolling over" funds from one account to another. Only retirement accounts use this terminology because they receive special tax treatment and therefore the rollover process is a bit antiquated.
You should prepare for the first step and look up a few pieces of information:
- Confirm the custodian of your previous employer plan. This is where the money is held such as Vanguard, Fidelity, or Merrill Lynch.
- Know where the money is going after you initiate the rollover. This can be another institution or money managers like Vanguard or Charles Schwab. Additionally, you may be moving the funds to your new employer plan.
- Make sure you have the new account number for the account that will be receiving the rollover transfer. If you are sending this to another employer retirement plan (i.e. a 401(k)) you will not need an account number, likely just your social security number.
- If possible, have the address available for the new destination as they will likely be mailing a check
Ok, you're ready to reach out to your custodian and learn the process!
- Call or contact your new custodian and ask them to determine the specific process to receive funds from a previous employer plan. Ask them to email this process to you so it's easily accessible. Additionally, if they will require a check make sure you ask for their mailing address and how to make the check payable.
- Call or contact your previous employer custodian to determine their specific process. If paperwork is required to initiate, have that emailed to you and send it back as soon as possible.
- Ask them to initiate a “direct” rollover transfer. Provide them with the mailing address and how to make the check payable, if applicable. Ask them to send the check directly to the new custodian, if possible.
- The custodian will sell your investments and issue a check for the rollover distribution. If they were unable to send the check directly to the new custodian BE ON THE LOOKOUT for this check! You will have just 60 days to send this check on to the new location for this money. If you delay too long you may have to pay taxes on the distribution so make sure you are checking your mail! Also, be sure not to deposit this check into your bank account. Taking possession of these funds can have adverse tax consequences.
- Follow up with the new custodian and make sure to invest the assets to your risk tolerance.
All in all, this process can take anywhere between 5 business days to several weeks so be patient but diligent. Please contact your Origin Planner if you’d like their assistance in filling out forms to complete this process.