401(k) Options When You Change Employers

When you change employers what becomes of your 401(k) account?

There are four choices. You can leave the money in your former employer’s plan, if permitted; roll over the assets to your new employer’s plan, if permitted; roll over the assets into an IRA; or make the big mistake of cashing out your 401(k) account. Nationally, this is a big money decision. According to Cerulli Associates, a Boston-based research firm, in 2012, about 3 million American workers rolled over approximately $289 billion from their employer-sponsored retirement plans into an IRA or into their new employer’s retirement plan.

The Rollover IRA was the most popular choice. Approximately $204 billion, with an average account balance of $128,400, went into IRAs directed by financial advisers. Another $85 billion, with an average account balance of $53,900, went into investor-directed IRAs. And the balance, $1 billion with an average account balance $91,000, was rolled into new employers’ plans.

In 2017, Cerulli estimates Americans will roll over an estimated $451 billion, making Rollover IRAs a $8 trillion marketplace.

Key factors to consider when deciding between leaving your money in your current plan, rolling over to a new 401(k), or opening a Rollover IRA include investment choices, fees and expenses, convenience, the potential to borrow from the account if necessary, protection from creditors and legal judgments, and required minimum distributions.

For instance, there are reasons why you might be better off leaving your retirement funds in your former company’s plan or moving them to your new employer’s plan. Employer plans provide federal creditor protection and you can defer required minimum distributions if you’re still working. On the other hand, a Rollover IRA might afford you investment choices, perhaps at lower fees, that are better alternatives for your portfolio.

If you’re thinking that’s a lot of ground to cover and worry that you could make a mistake, you should discuss this with your financial advisor.

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