Your Options when Leaving a Job with a Qualified Retirement Plan: Option 1 – Leaving the Assets in the Plan of the Former Employer

This is a continuation of our previous blog post about the options available to you when leaving a job that had a qualified retirement plan, like a 401(k) or a 403(b) or a pension plan. Today, we’ll be exploring the pros and cons of the first option on the table—to leave the money where it is.

The first option is to leave the money in the former company’s plan.

Pros:

This is most likely the easiest administratively, but not all employer plans allow you to keep the funds there. You’ll first need to get in touch with someone in the human resources department at your old firm to ask if this course of action is even available.  If your former employer will allow you to keep the funds in this plan, little action is necessary. It is possible that all you’ll have to do you right now is to sign some paperwork attesting that you are aware you’ll no longer be able to contribute to the plan.

Furthermore, you retain the contributions you’ve made over time, and the investments available and the fees charged may remain the same. This can be a substantial advantage of this choice of action in one or both of two scenarios. Perhaps you were very comfortable with your chosen investments in this previous employer’s qualified retirement plan and would like to keep your investment experience consistent. You also may be in a situation where the fees charged for these investments are quite competitive relative to what else is out there.

Even better, you maintain the option to roll over your savings into another retirement plan in the future. That is, you can always do a retirement plan rollover into another employer’s plan or into an individual retirement account (more on these options in later blog posts).

Cons:

However, you can no longer make contributions to this account. In order to make a contribution to a qualified retirement account, you must be directing “earned income” into the plan. If you are no longer working for this employer, you do not have any continuing earned income you can contribute.

It can also be quite complicated to have multiple retirement accounts. I know it’s a cliché, but having a lot of cooks in the kitchen can make things more complex than they need to be. It makes things even more complicated if you hold stock in this former employer in this retirement account. Because of additional tax and financial planning questions which may arise, I recommend that you consult with your tax and investment advisor before taking any action. Keep in mind that the tax issues in this area are quite complex, and you should seek professional tax assistance.

All in all, there are many factors that weigh into this option perhaps being the best one when leaving a former employer. It’s helpful to have a partner to help you evaluate all these pros and cons, and we often work with clients in situations like these to make the right decision for themselves and their families in the future.

Stay tuned for my discussion on the second option of rolling into the plan of a new employer.

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