Click here to learn more about our financial professionals by visiting FINRA's BrokerCheck.

1609 Lancaster Ave
Reading, PA 19607

Kaufman Financial Services

(610) 775-1490


What to do with an old employer sponsored retirement plan.

| May 06, 2013

About half of all employed Americans have some kind of retirement plan that is sponsored by their employer. If you’re one of those Americans, you know what I’m talking about: the retirement plan that sucks money out of your paycheck every month. Well, in most cases they are great to have; but what do you do when you leave that company and have an old plan straying behind? You roll it over!


What is a rollover? A rollover is when you take an old retirement plan and move it to an IRA. This keeps your money tax-deferred. If you simply took the money out of your old plan, a distribution, the entire account would more than likely be taxable and that could create havoc on your tax return and taxable income. You can rollover your money whether your employer sponsored retirement plan is a traditional or Roth account. There are certain things that typically make you eligible to do a rollover, such as, but not limited to: death, disability, reaching normal retirement age, termination of the plan, and the most common, separation from service.


Whether you work in the private sector and have a 401(k), work at a school or hospital and have a 403(b), or work for a government entity and have a 457(b); when you leave employment, you’re typically eligible to roll those dollars over to an IRA. *

 *{Every retirement plan is unique in its own way. You should consult your financial advisor before rolling over an old retirement plan. In addition, since the 401(k) typically is the most common type of plan, I will tend to refer to employer sponsored retirement plans as 401(k)’s during most of this blog post}.




Now you know you may be eligible to rollover your plan to an IRA when you leave work, but why should you? There are several reasons. First, employer plans offer a platform of investments that the employee can choose from. There is an expanding universe of investments that individuals can invest in; however, depending on the size of the plan, in most 401(k)’s, participants are limited to about 10-15 investment options (Yahoo Finance). In addition, these 10-15 options may not be the best investments in a particular class of funds. Meaning, your 401(k) may have a bond fund but it may not be as good as other bond funds in which you could invest (the same goes for the stock funds). Moreover, there are so many different kinds of bond funds, you typically don’t want to be limited to just one kind, or even just an index bond fund. Likewise, the bond funds (and stock funds) may not be suitable for you. Just like stocks, bonds come in all different types of classes and diversification is always important. Your ability to diversify across good funds in a 401(k) may be limited.


Second, 401(k)’s can carry higher costs than IRA’s and other types of accounts. In fact, according to a think tank Demos, an ordinary American household with two working adults can pay as much as $155,000 in 401(k) fees in their lifetime (CNN). That’s an extraordinary number and, frankly, most Americans don’t understand the 401(k) fees they’re charged. In 2012, AARP asked 800 employees with 401(k)’s what they paid in fees; the result, 70% of them responded that they weren’t being charged anything (CNN). Although you may think you’re not getting charged much in 401(k) fees, it’s not always as clear as day to figure out how much you’re really paying.



Finally, the IRA is usually just simpler to have. The IRA and 401(k) have some similar tax rules but 401(k)’s are heavily regulated and accessing your money can be a hassle. In addition, Americans tend to change jobs multiple times during their lifetime. That typically means multiple 401(k)’s held with different employers if those dollars are not rolled over to an IRA. The consequence: a ton of paperwork and confusion. That includes paperwork for any plan changes (which can happen often), heavy doses of disclosure statements that each plan is required to provide by law, and statements from each plan every quarter. Instead with one IRA, you can rollover all past plans to that IRA and keep everything simple and consolidated in one location. The result: much more control over your money, organization, consolidation, and peace of mind.


When you change jobs, it can be stressful and you may have a lot of puzzle pieces to put in place before you feel truly comfortable. However, you don’t want get caught up in the stresses of changing jobs and forget about your old 401(k). Depending on how long you worked at that employer, it could be your largest asset. Leaving it behind may cause you to neglect the account. Rolling old retirement plans over to an IRA is usually the best option but you should always talk to your financial advisor and tax professional before making a decision.

Dougpinion: Roll over old plans to an IRA. If you had a Roth 401(k), roll it over to a Roth IRA. There tends to be more freedom and leniency in an IRA. In addition, if you roll over your old plan to an IRA, depending on your situation, you should start thinking about converting that new IRA to a Roth IRA. The Roth will allow you to grow your dollars tax-free until retirement. However, you should definitely consult your investment advisor and tax professional before making this choice. Finally, when you start at your new job, talk to your financial advisor to get help on how to invest your money in that plan and as long as your budget can handle it, contribute up to the full amount of money that your company will match. It’s free money.


-Douglas Kaufman

     Financial Executive, Member FPA

     Kaufman Financial Services


** Securities by Licensed Individuals Offered Through Investacorp, Inc. A Registered Broker/ Dealer Member FINRA, SIPC. Advisory Service Offered Through Investacorp Advisory Services, Inc., A SEC Registered Investment Advisory Firm. Linked sites are strictly provided as a courtesy. Investacorp, Inc., and its affiliates, do not guarantee, approve nor endorse the information or products available at these sites nor do links indicate any association with or endorsement of the linked sites by Investacorp, Inc. and its affiliates.

This information is intended for general information purposes only and is not intended to provide specific investment advice or recommendations for any individual. This is for illustrative purposes only It is suggested that you consult with your tax, legal and/or financial services professional regarding your individual situation. Investment value will fluctuate with market conditions. Past performance is no guarantee of future performance.