Leave it Where it Is
If your balance is greater than $5,000 there may be no reason to do anything with your account.
Advantages
Some reasons why you might want to leave your account invested in your former employers plan include:
- Continued tax-deferred growth.
- For most plans (those covered by ERISA), federal law requires plan fiduciaries to prudently monitor the cost and quality of the investment options in the plan. Therefore, your plan may offer investment choices that are less expensive than those available to you outside of the plan.
- The company may be paying some of the expenses associated with maintaining your account (not all do, a fee comparison should be an major factor in your decision).
- The plan may permit terminated employees to borrow or continue making payments on their plan loans (see “About Plan Loans”, below).
- Employer-sponsored plans may offer better protection from creditors and legal judgments than IRAs (both are protected in bankruptcy).
- If you are at least 55 years old at the time you leave your job (or you are disabled), you may be eligible to take penalty-free withdrawals from the plan, the withdrawals would still be subject to current income taxes.
- If your account contains significant holdings in employer securities that have appreciated significantly you should consider the tax implications of any distribution involving those securities. They could eventually provide certain tax-benefits associated with long-term capital gains treatment.
About Plan Loans
If your account contains an outstanding loan, that will impact your distribution decision. If you take a distribution from the Plan, the outstanding balance will be taxable as income.
You might consider:
- Remaining in the Plan if you will be allowed to continue making repayments,
- Paying off your loan prior to rolling over your account in order to avoid taxes and penalties on the loan amount.
In fact, it is not uncommon for employer plans to extend borrowing privileges to terminated employees. Check your Summary Plan Description (SPD) to confirm.
About Company Stock
If your account contains highly appreciated company stock of your employer, you might be able to take advantage of special tax treatment on the net unrealized appreciation (NUA) on those shares. In order to do so, you would not want to roll over the company stock portion of your account to an IRA.
You should seek professional financial advice, if you think this applies to you.
Disadvantages
- You do not have control over the plan investments or services available to you. Your former employer will make those decisions.
- The plan may offer a limited number of investment choices (unless it permits the use of a brokerage account).
- The plan may assess fees to your account for administrative or other reasons,
- If the plan is ever terminated, access to your account could be limited while waiting for regulatory approvals.
- You may not have access through the plan to personalized investment advice or advice that takes into consideration your other assets or particular needs.