I'm leaving my old company behind and starting somewhere new. What about my old retirement accounts?
Changes
In a very happy reminder to "Ask for your worth," I'm switching employers and doing the exact same job but making $30k/year more in base salary. This will make maxing out my 401k a lot easier.
Part of the increase was driven by working at the same company for so long (they already know what they pay you, so there's very little room to negotiate and very little motivation to give large raises). Part was more experience on my resume, which helps command a higher salary.
My mentors and my boss encouraged me to take the new role---it was universal agreement on their part. So after a couple weeks transitioning, I turned in my badge and laptop, and off I went.
Old Retirement Accounts
Many plans will allow you to leave your accounts open even after you leave the employer. Sometimes, that's the right choice, especially if it's a good asset management company with good investment options and low expense ratios. But there are potential risks to leaving accounts behind:
- Fees (including fees the employer used to cover) chipping away at growth
- It's harder to balance and more to track across multiple accounts, which can result in over- or under-exposure of certain asset classes in your overall portfolio that don't align with your goals
- You might not be informed of changes (including those to investment options, fees, or even plan administrator)
- An employer or plan administrator may go out of business, resulting in a time-consuming chase to find your account
- The more 401k accounts you have, the more complicated RMDs (Required minimum distributions) become later in life
- Careful! Once the money is removed, it usually can't be returned.
Tax-advantaged accounts can be rolled over/transferred to another tax-advantaged account, which doesn't create a taxable event. In addition to avoiding the risks of old accounts, potential benefits of rolling over into an IRA include:
- Access to more options
- Consolidation, which makes things simpler---and easier. There's only one account (or at least one login) to rebalance.
Potential benefits of rolling over to the new employer's plan include:
- Stronger legal protections from creditors (they're federally protected under ERISA) and lawsuits, as compared to an IRA (which relies on protections from the state).
- A huge benefit of keeping money in a 401k is the "Rule of 55," which allows retirees to take withdrawals without the additional 10% penalty after age 55 if they've actively retired from that company.
- If you want to do a backdoor Roth (high earners can invest in a nondeductible IRA and immediately roll it over to a Roth IRA), this is the better option due to the Pro-Rata Rule.
- Note, if a portion of the old 401k consists of Roth contributions, the new plan needs to accept them and keep them separate from traditional contributions. You can always roll the Roth portion into an IRA and the traditional portion to the new 401k.
Rolling, Rolling, Rolling
I rolled the whole thing over to my IRAs at Fidelity, and I'm happy to report the trades are all settled.
First, I rolled over my Roth 401k funds to my Roth IRA, following up regularly to check on status and make sure the money went to the correct account. After that settled, I rolled over the traditional portion into a new IRA. Doing it in two separate parts made me feel more comfortable that there wouldn't be an administrative error.
- Florida Statute 222.21 protects traditional IRAs and Roth IRAs from creditor claims, just like ERISA protects a 401k. Thumbs up for legal protection!
- The options in my new plan weren't comparable to my IRA.
- I'd owe a quarterly investment fee if I left it behind. Reducing fees means more growth.
- Consolidation makes things easier. Simplicity is easier. We like easy.
Though I'm not gonna lie---seeing $0 in my new 401k is hitting all my insecure feels. "I blog about money and my account balance is $0" is just not the vibe. But it'll grow as I continue to save.
Onward and upward!