Old Employer-Sponsored Retirement Plans (Ways To Manage) | Trust Point
Click Here to Select Your Login

Four Ways to Manage Old Employer-Sponsored Retirement Plans

By
Updated April 27, 2018

Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.

As you switch jobs or prepare for retirement, It’s crucial to get your old employer-sponsored retirement plans in-line with your financial goals. To ensure you have adequate retirement funds, here are four ways you can manage old employer-sponsored retirement plans and take control of your financial future.

What are employer-sponsored retirement plans?

Employer-sponsored retirement plans can provide you with a reliable source of income when you retire. They generally fall into two categories: defined contribution plans and defined benefit plans.

A defined contribution plan, such as a 401(k), doesn’t give you a guaranteed payment when you retire. This type of plan allows you or your employer (or both) to contribute to your personal account under the plan, many times at a set rate, such as four percent of your yearly salary.

Defined contribution plans put investment risks on the shoulders of the employee, as the account value fluctuates based on changes in investment value. When you retire, you get access to your account balance, which depends on contributions plus or minus investment gains or losses.

The other type of plan, defined benefit, promises the participant a specified monthly benefit at retirement. The benefit may come in the form of a fixed dollar amount or may depend on a plan formula that takes into account things like years of service, salary or wages.

These are often what’s referred to as pension plans. Employers will sponsor defined benefit plans and normally hire investment managers to make crucial financial decisions. With this type of plan, the employer will shoulder any investment risks.

1.Leave It Be

The first piece of advice may be straightforward, but it’s incredibly important. Simply leave your employer-sponsored retirement plan be. Many of the best companies will let you leave your retirement savings invested in their plan after you retire or switch jobs. This gives you the chance to keep your savings in a tax-advantaged plan until you decide to use it.

Unfortunately, it can become stressful to manage more than one employer-sponsored retirement plan over the course of your career. For instance, keeping track of individual account statements from each of your plans and effectively managing your investments becomes tricky with the more plans you have.

Additionally, even though you may be able to leave your account invested in your former employer’s plan, you are bound by the plan’s rules and restrictions on investments as well as any extra restrictions for former employees.

Advantages:

  • Familiar investment choices
  • Continued tax-deferred growth
  • Asset protection from creditors
  • Fees may be less than an IRA
  • Penalty-free withdrawals may be available at age 55
  • Call center or online resources may be provided to help answer retirement questions

Disadvantages:

  • Roth RMDs required at age 70 ½ if not employed
  • Tax deferral extension after original owner’s death may not be allowed
  • May not allow Roth conversions
  • Minimum balance may be required
  • Fees may increase if no longer an employee
  • Potential for limited withdrawal options, such as restrictions on periodic distributions or lump sum requirement

2.Rollover your assets into an Individual Retirement Account (IRA)

A rollover transfers your employer-sponsored retirement plan directly into a traditional IRA or a Roth IRA. While this option may mean you have to pay more in fees and expenses, you’re putting money into a tax-advantaged plan that will give you broader investment options than what you previously had with your employer-sponsored plan. This will give you the opportunity to maximize your retirement investments.

One thing to consider if you take this approach is Net Unrealized Appreciation (NUA), or the difference in value between the average cost basis of shares and the current market value of the shares held in a tax-deferred account. So, If you have company stock investments, the cost basis of the company shares are subjected to tax at the time of distribution and the difference is taxed when the stock is sold. In this case, the tax advantages of NUA is lost if you roll your employer-sponsored plan into an IRA, so it may not be worth it.

Advantages: 

  • Continued tax-deferred growth
  • Independence from former employer
  • Greater investment flexibility and control
  • Extended tax deferral after original owner’s death
  • If 701/2, may make direct Charitable IRA Distributions
  • Consolidation of IRA and 401(k)s may streamline investment monitoring, distribution strategy, and tax planning
  • No required minimum distributions from Roth source funds
  • Traditional to Roth conversions allowed

Disadvantages: 

  • Borrowing money against an IRA is prohibited
  • Fees and expenses may be higher
  • Required minimum distributions (RMDs) are mandatory, even if still employed
  • Asset protection from creditors limited by state law
  • Penalty-free withdrawals are generally not available until 59 ½
  • Five-year waiting period for tax free withdrawal of Roth IRA earnings

3. Transfer your assets to your new employer’s plan

If you have a new employer that can provide a retirement plan, you may be able to simply transfer your assets into your new employer’s plan. Having your retirement plan accounts in a single location makes it easier to manage and still gives you tax-deferred benefits.

When trying to transfer to a new employer’s plan, first ask whether their plan allows you to transfer retirement assets from your former employer’s plan. Sometimes, there is a waiting period before you can sign-up for a new retirement plan. Secondly, scrutinize your new plan’s investment options to determine if they’re more advantageous than your previous plan. If not, then keep you money where it is — in the plan that has the biggest benefits and returns. Finally, you’ll have to find out at what age you can access your savings in the new plan without paying penalty fees.

Advantages: 

  • Continued tax-deferred growth
  • Asset protection from creditors
  • Fees may be less than an IRA
  • Penalty-free withdrawals may be available at age 55
  • Consolidates retirement assets into one location
  • Possible to delay RMDs if still employed at 70 ½
  • May be able to borrow from the rolled over money
  • Call center or online resources may be provided to help answer retirement questions

Disadvantages: 

  • Tax deferral extension after original owner’s death may not be allowed
  • Potential for limited withdrawal options, such as restrictions on periodic distributions or lump sum requirement
  • Roth RMDs required at age 70 ½ if not employed
  • May not allow Roth conversions
  • Fund expenses could be higher or the plan may include other fees
  • A waiting period may be required before rollovers allowed

4. Take a Lump Sum Distribution

With a lump-sum distribution, you will gain immediate access to your account funds

One note of caution: depending upon your age, this option can be expensive due to early withdrawal penalties. Additionally, taxes may be levied by the IRS. if you withdraw the funds before age 59½, you can hit substantial tax penalties. As with any financial decision, make sure you understand the tax implications before withdrawing from your employer-sponsored retirement plan.

Advantages:

  • Immediate access to cash

Disadvantages: 

  • May have penalties & fees
  • Forfeit future tax-deferred growth opportunity
  • Funds may not be available for retirement
  • Distributions included in current year taxable income may result in taxation at higher tax bracket

Need more help with your employer-sponsored retirement plan?

Contact Trust Point today for all of your retirement planning needs. We’ve been serving clients with custom-tailored financial plans for more than 100 years. Through our successful retirement services, we have the experience to help you meet your financial goals. Get in touch.

Share This Post

Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.