Written By Jared Costigan, CFP®
As you review your financial portfolio, you've stumbled upon a noteworthy relic – your old employer's retirement plan. It might be from your residency days, a gap-year job that you took before med school, or another forgotten account from long ago.
If you recently transitioned jobs and want to get a handle on your retirement savings accounts, here are factors to consider and how to proceed with your old 403(b), 401(k) or other employer retirement plan.
Questions to ask about your current 401(k)/403(b)
Look around your retirement plan portal to see where your plans are today. Your HR representative (who’s typically the plan administrator) or your financial advisor can help you investigate some of these questions:
- What investment options are available to me?
- Are they low-cost (<0.30% net expense ratio) index funds?
- Do the investment options cover the asset classes that I’d like to invest in?
- Are there any limitations to changing my investment strategy in the future?
- How much do I need to have in this account to keep my assets with my previous employer’s plan after my employment is terminated?
- Do I have a loan outstanding on this account? If so, what are the repayment terms after my employment ends?
- Do I have any Roth account contributions here? How much is Roth vs. pre-tax?
- How much of the account balance is from employer-sponsored contributions, and have I met the “vesting requirements” to keep those funds after I leave the job?
- Do I receive any financial advice as a benefit of having my account here? If so, do I pay extra for this service and what areas of my financial plan are they willing to discuss?
- Do you plan to make any withdrawals from these funds? When and for what purpose?
3 Ways to handle an old 403(b) or 401(k) account
Depending on your situation and retirement goals, there are a few ways to proceed.
1. Rollover to new employer's plan
If your current employer allows you to rollover outside funds, this can help keep your financial accounts simple with just one employer retirement plan. Review the new plan’s fees, including maintenance expenses for the account.
If the investment options in your current employer’s plan include a wide range of asset classes available in a low-fee passive index fund, this is often the cleanest and simplest solution. Some plan documents don’t allow you to rollover outside funds, so check with the custodian before proceeding.
2. Keep assets at current 401(k)/403(b)
Review your old employer’s plan for advantageous features like a guaranteed-rate fixed income fund. If your new employer’s retirement plan doesn’t have access to low-cost index funds, or there’s an asset class that’s not captured in your new investment options (such as real estate or small cap funds), there’s little downside to keeping your account in the old plan.
It’s one more account to keep track of. If there’s no particular advantage with sticking with your old plan, and you’re comfortable with your current employer’s options, it might be best to roll over your account to your new employer’s plan.
3. Rollover to an IRA or Roth IRA
An IRA gives you access to the full universe of investment options available at your IRA custodian. 401(k)s have limited investment options, and some plans might steer you into proprietary funds that carry high expense ratios. Be careful to review your contribution types in your current plan.
If you have both pre-tax and Roth contributions in your account, you can roll the pre-tax balance to a traditional IRA. The Roth balance can be rolled into a Roth IRA to avoid realizing additional taxable income.
Beware of rolling into an IRA if you plan on completing backdoor Roth IRA contributions now or in the future. High-earners and married couples who file taxes as married filing separately (very common for student loan borrowers) can’t contribute directly to a Roth IRA and can’t deduct contributions to a traditional IRA.
If you’re planning to complete Roth conversions or a backdoor Roth IRA contribution in the next couple of years, a rollover to an IRA isn’t advised due to the “pro rata rule”.
Converting an outstanding balance from a pre-tax IRA account — like a traditional IRA, rollover, simple, or SEP-IRA — to Roth IRA, will be treated as partially pre-tax dollars and partially after-tax dollars, diluting the impact of your strategy.
Additional factors to consider
Do you need access to the funds earlier than your “retirement age” of 59.5?
All tax-advantaged retirement accounts have very specific rules around when and how you can access these funds. Generally, pre-tax accounts in a 401(k)/403(b)/IRA can’t be withdrawn penalty-free before age 59.5.
There are some exceptions to this rule, and it’s particularly important if you plan to retire or supplement your wages from your retirement savings earlier than 59.5. For example, if your assets were in a 401(k) and you separate from service after age 55, you can avoid the 10% penalty on early distributions.
If you rolled this account into an IRA upon retirement, you wouldn’t be able to utilize this exception to an early withdrawal penalty. A few other examples of exceptions to the 10% early distribution penalty are buying your first home, excessive medical expenses and qualified education expenses. The rules differ based on account type, so review what you might need these funds for and when you might need them.
Do you hold an annuity within your existing retirement plan?
Many 403(b) and 401(k) plans allow you to purchase annuities within your plan. Consider if, when, and how you can initiate a rollover. A very common retirement plan for physicians is a 403(b) retirement plan with TIAA, but there are some additional nuances when it comes to these plans.
Some plans offer an annuity product titled “TIAA Traditional.” This fund offers a guaranteed fixed interest rate return which can offer nice stability in the fixed income portion of your portfolio, as it’s not subject to fluctuation in the principal value that you invested in the fund. When considering rolling over an account with TIAA to an IRA or another employer’s retirement plan (e.g. 401(k)/403(b), etc.) there are some additional considerations for these fixed annuity holdings.
The TIAA Traditional offering can be a valuable benefit from your former employer that you might decide to keep depending on its contract’s rate and terms. Compare the guaranteed yield offered at TIAA to current market yields in the bond funds that are available in the plan you’d like to rollover to.
Consider that bond funds have a risk of principal loss, whereas the annuity doesn’t. If you determine that you’d like to rollover your TIAA traditional funds, there might be restrictions on how you can do so.
TIAA Traditional contracts can be categorized as having full liquidity or delayed liquidity. As a plan participant, you might have access to one or both contract types. You might need to contact TIAA to determine what type of TIAA traditional contract you hold.
Full liquidity contracts allow lump-sum withdrawals and transfers at any time with no surrender charges. Delayed liquidity contracts have varying terms – importantly, some of these contracts have more flexibility to roll these over in the first 120 days after leaving the employer.
That said, it’s important to consider this decision shortly after leaving your job. If the contract is a Retirement Annuity (RA) or Group Retirement Annuity (GRA) you might be limited to making transfers or withdrawals annually over a 10-year period.
Your investment strategy includes all of your investments
Ultimately, when considering your investment and tax strategy, review how much risk you’re taking (asset allocation) and what you’re invested in (diversification) across all of your accounts.
Having a properly diversified 401(k) doesn’t necessarily mean that all of your investment accounts are properly diversified and allocated. Review the tax implications of various account types and asset classes, and identify which accounts should hold which investment.
Your employer retirement plans have the most restrictions as to what you can invest in than any other account type. Consider working with a financial planner to review which option might be best for your specific financial situation. Our team at SLP Wealth can help — book a consultation today.
