Changing jobs is an exciting time, but in the midst of the transition it’s easy to forget about your retirement savings. One common mistake people make is leaving their 401(k) behind with their old employer, which can also leave you with less control of your investments and awareness of how your portfolio is performing. 

As frequent career changes become more commonplace, it has become even more likely for retirement funds to be dispersed across multiple accounts. Research shows that the average person holds 12 jobs during their working life, or about once every four years. This can lead to quite a trail of retirement accounts at previous workplaces.

Rather than leaving your 401(k) in the hands of the former employer, you should consider rolling over these funds to an IRA when you switch jobs. This action will help you manage your retirement savings more easily and allow you to make more informed decisions about your financial future.

Why You Shouldn’t Leave Your 401(k) Behind

Keeping your 401(k) with a former employer’s plan is usually allowed as long as you have a sufficient amount of money in the account — $5,000 in most plans. Employees sometimes opt to keep their retirement funds with a previous employer because they’re satisfied with how the account is being managed. This approach is also much preferable to cashing out the fund when you depart a job, which can often result in an early withdrawal penalty plus a tax on the distribution.

In many cases, however, employees simply leave their 401(k) behind because they don’t think to move over the funds to a new retirement account, or because they think it will be too complicated or time-consuming to do so. They may believe that it’s wiser to leave the funds to mature in a separate account as a way of diversifying their retirement investments.

Unfortunately, leaving your 401(k) with a previous employer can also create several disadvantages for your retirement savings:

  • Slower growth: While a 401(k) with your previous owner will continue to grow with market gains, you’ll no longer be able to contribute to it through payroll deductions. This will cause you to lose out on compounding gains, while also realizing smaller gains from any retirement account you start from scratch with a new employer.
  • Limited investment options: Your previous employer’s 401(k) plan may have a restricted selection of investment choices, which will limit how much you can tailor your portfolio to meet your goals.
  • Management challenges: It might be difficult to access 401(k) accounts to monitor their performance or rebalance your investments if you are no longer working with the company. It can also be challenging to track down your account if your former employer goes out of business or is absorbed by another company. 
  • Hidden fees: Some 401(k) plans have hidden fees that continue to be deducted over time, diminishing your long-term returns.
  • Forgetting it’s there: When you don’t roll over a 401(k), there is always the risk that you’ll simply forget it exists and lose a substantial amount of savings. It’s a risk that only grows greater if you have several 401(k) accounts scattered across different employers. 

Why Rolling a 401(k) Over to an IRA Benefits You

Rolling over your 401(k) savings to an IRA is a convenient way to update your retirement savings strategy when you switch jobs. There are several compelling reasons to consider taking this action:

  • Convenience: When you have all of your retirement savings in one place instead of held in numerous different accounts, it provides a simplified way to manage these assets  and track your overall progress toward your retirement goals. An IRA also establishes a retirement account that you retain ownership of even if you switch employers, allowing you to consistently contribute to it and realize stronger gains over time.
  • Broader investment options: IRAs have a more diverse set of investment options compared to most 401(k) plans, allowing you to invest in options like stocks, bonds, mutual funds, and exchange-traded funds (ETFs) to potentially enhance your returns.
  • Greater control: IRAs give you the option to choose your own investment strategy, whether it’s a passive approach with index funds or a more active strategy with individual stocks. This allows you to optimize your portfolio to meet your specific goals and risk tolerance.
  • Tax options: You can choose an IRA option that is most tax-advantaged to your current circumstances. Traditional IRAs are tax-deductible to help lower your taxable income, while withdrawals are taxed as ordinary income. Roth IRAs use after-tax contributions and allow for tax- and penalty-free withdrawals during retirement. 
  • Potential savings: IRAs may have lower fees compared to some employer-sponsored 401(k) plans.

Rolling Over Your 401(k) with Grey Ledge Advisors

Rolling over your 401(k) to an IRA is a relatively straightforward process. As a first step, you can   contact  Grey Ledge Advisors to assist you in setting up your new account with a new IRA custodian. Then you contact your current 401(k) administrator and request a direct rollover to the new IRA. Since this action transfers funds from one qualified retirement account to another and does not withdraw them, you will not incur any taxes or penalties.

If a direct transfer is not available, you’ll need to do an indirect transfer by requesting a check payable to the new IRA custodian. However, you have only 60 days from receiving the check to deposit it into your IRA to avoid tax penalties.

Working with a financial advisor like Grey Ledge Advisors will not only help you complete the rollover process efficiently, but also provide you with a valuable partner as you pursue your retirement goals. An advisor can also guide you through any unique circumstances, such as what to do when a 401(k) with a previous employer includes company stock.

Grey Ledge Advisors also abides by the fiduciary standard, which means we act in our clients’ best interests. Rather than chasing commissions, we seek out the lowest cost investments that have a higher probability of maximizing our clients’ returns — including options for minimizing IRA fees.

Contact Grey Ledge Advisors using our online form or give us a call at 203-453-9075 to begin a 401(k) rollover process.

Helping our clients achieve their financial goals