Is your old retirement plan moving to a new provider? Here’s what you can do
From time to time, employers will replace the financial institutions that service their workplace retirement plans. If you have money in a former employer’s plan, this kind of switch will affect your retirement savings. But the good news is, you have options for your savings. Here’s a look at what those options might be, the pros and cons of each, and the factors that can help you determine which is appropriate for your retirement savings.
What options do you have when there’s a switch of plan providers?
First, it’s important to know that if you still work for the employer that offers the transitioning plan, your account will move to the new provider, and you can continue making contributions while still having the opportunity for tax-deferred growth. Before the transition begins, you’ll be introduced to the new provider and a new investment lineup.
Things are different if you’ve left the employer but are still in their plan. While you’re no longer able to put money in, you have several options available for your savings. And this creates an important retirement planning opportunity for you.
By doing a little research and, if appropriate, taking action before your old plan’s announced transfer date, you can help make retirement saving and investing easier for years to come. What’s more, you can continue building for your future with a provider that you select.
So, if you’ve received notice that an old retirement plan is moving, here are four options you may have for your retirement savings—and a few details on what makes each one unique.
1 Staying in your previous employer’s plan as it moves to a new provider
This is the simplest option—do nothing and ride with the change. Most plans allow former employees to leave the money right where it is, provided their balance is above a certain minimum level (typically $5,000).
By staying in the plan, you’ll keep your savings invested with the potential to grow tax deferred. But because other options offer this same important advantage, you’ll want to look closely at the features offered by the incoming provider and the new investment lineup. And you should feel confident that they’ll help keep you on track toward your retirement goals.
One potential drawback of staying in a former employer's plan that's in transition is that your savings will be invested in a default fund that your former employer selects. Depending on your goals, you may not see this as the best option for your savings.
PROS |
CONS |
Staying in the plan defers current taxation |
You can’t make additional contributions if you stay in your old employer’s plan, and there may be different rules for inactive employees |
Your money can continue to grow tax deferred |
Your investment options will be determined by the employer’s plan |
You may be able to take penalty-free withdrawals after age 55 |
Future changes to a plan may change the process for accessing your money |
Even if you don’t take any action, you can still access your savings once the plan is moved to the new provider |
If you want to take a withdrawal, you’ll be subject to the plan’s guidelines |
2 Moving your savings to another employer’s plan
Under IRS rules, people are allowed to move money directly from an old workplace retirement plan to a current employer’s plan—provided the current plan’s rules allow for it. This type of move provides some important advantages. It preserves the potential for tax-deferred growth. It also makes your retirement savings simpler to manage, since you’re going from two accounts to one.
There are two ways to roll money into a current employer’s plan. With a direct rollover, your money is transferred directly from the old plan into your new one, so you never have it in your own hands. With an indirect rollover, you withdraw your savings in cash and move it yourself into your new plan within 60 days.
But be aware that the indirect rollover comes with a catch. The IRS will require 20% withholding on the initial withdrawal from your previous employer's plan. Although this amount is refundable at income-tax time, you’ll need to use your own money to make up the difference—and ensure that the amount you roll into your current workplace plan matches the amount you had in your old one.
PROS |
CONS |
A rollover to a current employer’s plan defers current taxation |
If you want to take a distribution, you’ll be subject to the distribution guidelines under the plan |
Your money can continue to grow tax deferred |
Your investment options will be determined by the employer’s plan |
You may be able to take penalty-free withdrawals after age 55 |
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You may have access to loans and hardship withdrawals |
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You may be able to make additional contributions under your new employer's plan and receive employer matching contributions, if eligible |
3 Moving to an individual retirement account (IRA)
Moving your savings from an old workplace retirement plan to an IRA, known as an IRA rollover, is another way to continue deferring taxes on your retirement savings and their potential growth. There are other benefits as well.
You can set up an IRA at any financial institution you choose and fund it with either a direct or an indirect rollover. Over time, you can add money to your IRA from various sources, including direct contributions and rollovers from other retirement accounts, making it easier to consolidate and manage your overall retirement savings.
Because an IRA is a personal account, it doesn’t depend on your relationship with a given employer. Even if you’re out of work, you can continue to save and invest through it.
An IRA’s investment options and fee structure can vary, depending on the firm and account type you choose. For instance, some provide access to a wider range of investments, including individual stocks and bonds, exchange-traded funds (ETFs), and socially responsible (ESG) investments.
Investment guidance, online tools, other features, and fees can vary by provider—so it’s important to compare the factors that are important to you.
PROS |
CONS |
A rollover to an IRA defers current taxation |
Withdrawals made prior to age 59½ may be subject to a 10% IRS early withdrawal penalty and will be subject to ordinary income tax; state and local taxes may also apply |
Your money can continue to grow tax deferred |
You can’t take a loan from your IRA |
You can make additional contributions |
There’s no employer matching |
You can consolidate multiple tax-deferred accounts |
Fees and expenses could be higher than in an employer's plan |
You may be able to take penalty-free withdrawals for a first-time home purchase or college education expenses prior to age 59½ |
4 Taking a cash distribution
The last option is to simply withdraw the money in cash from your previous employer’s plan and close the account, but don’t let the word “simply” fool you.
Unless you’re age 59½ or older, a cash distribution may not be a good idea. Prior to that age, you’ll be charged a 10% early withdrawal penalty fee, plus, regardless of your age, you’ll pay state and federal income taxes on the full amount withdrawn. You may even wind up in a higher tax bracket for the extra income that year.
Cashing out is a costly option and should only be considered in cases of extreme hardship. You should always consult a professional and make sure you fully understand the repercussions of this option before taking it.
PROS |
CONS |
Immediate access to your money (once the distribution is processed and applicable taxes and possible penalties are withheld) |
Your cash distribution will be subject to a potential 20% federal income-tax withholding and, possibly, additional federal, state, and local income taxes when you file |
You can still roll over all or a portion of your money without any tax consequences if you do so within 60 days of taking a distribution |
Your cash distribution may be subject to a 10% IRS early withdrawal penalty if taken prior to age 59½ |
By taking a cash distribution and not investing the proceeds, you may sacrifice any potential growth of your retirement assets |
Factors to consider when choosing your next retirement account
Should you stick with your previous employer's plan through its upcoming transition or look elsewhere? To help you decide, consider a side-by-side comparison of these important factors.
- The breadth and quality of investments—Be sure to compare the investment lineups of all the plans you’re considering—your old plan (specifically, the lineup after the change of providers), your current employer’s plan, as well as any IRAs you’re interested in. If you’re relatively new to investing, talk to a professional who can give you guidance on this matter.
- Services and account features—Different accounts come with different features and offerings. For example, many retirement plans offer advice services, either free or for a fee. If you prefer a hands-off approach to investing, you may want to go with a plan or an IRA that offers a managed account solution.
- Liquidity—While it’s never ideal to dip into your retirement savings, life happens. Look into the rules and potential penalties for accessing your savings before age 59½.
- Taxes—Regardless of your age, it’s important to know the tax implications of any move you’re considering with your retirement savings. And be extra careful about cashing out your account: It can trigger substantial income taxes and penalties, and possibly even push you into a higher tax bracket.
- Fees—Whatever next step you’re considering for your savings, it’s important to know what your costs will be. Keep in mind that an annual or semiannual account fee is only part of the expense. Be sure to factor in any additional investment, trading, transaction, and service charges as well.
Now’s a good time to do your homework—and act
If your former employer has announced a new provider for their retirement plan, be sure to take advantage of the time before the announced conversion date.
As you’re considering what the revised plan has to offer you, expand your view to include other available alternatives, including your current employer’s plan and IRAs from various providers. Take the time to understand your options, including the possible advantages and disadvantages of each.
And prepare to take a step that makes sense for you and your future.
Important information
There are advantages and disadvantages to all rollover options. You are encouraged to review your options to determine if staying in a retirement plan, rolling over to an IRA, or another option is best for you.
This content is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
Important disclosures
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