Skip to content Skip to sidebar Skip to footer

What To Do With Your Retirement Account at Work When You Leave

February 2022

When you leave your job for whatever reason, and you have a retirement plan with that to-be-former employer, you’re at a decision point about the money you have in that employer’s retirement plan. The following is an outline of what you need to consider.

Background – Clients Now Have Choices

For the purposes of this article, an employer’s plan refers to a 401k, 403b, 457, 401a plan and their Roth counterparts.  Years ago, employer plans almost universally required employees who left employment to remove the money from the plan.  Most of them would roll the money into an individual retirement account (IRA).  A smaller subset would pay the taxes and any applicable penalty and walk away with cash.  These rollovers to IRA accounts were highly lucrative for financial institutions.  Not surprisingly, employee-consumers were often exploited. 

More recently, employees who leave their jobs have choices about whether to leave their money in their employers’ plans or remove it.  Needless to say, financial institutions regularly encouraged clients to move the money into IRAs, whether it was in their best interests or not. 

To protect these employee-consumers, the US Department of Labor has finally succeeded in requiring financial advisors to use a fiduciary standard of care with clients with respect to this rollover decision (unless, of course, some court throws it out again).  A fiduciary is required to put the clients’ interests ahead of their own.

What this means is that when you are working with a financial institution on what to do with your employer-plan funds, you will now have to go through a detailed exercise about your options and the consequences.  Of course, you will also most likely sign a disclosure saying you’ve completed that analysis.  Here is what you need to consider.

Your Options

Every employer retirement plan is different, and generally, these are your options when you leave an employer:

  1. Keep your assets in the plan
  2. Roll the assets into an individual retirement account (IRA)
  3. Roll the assets into your new employer’s plan
  4. Take a distribution in cash from the plan

You should carefully weigh the advantages, disadvantages, fees, and features of each option in the context of your individual needs and circumstances.   The following are general factors to consider for each option above.

#1:  Keep your assets in the plan. 

If you decide to keep your money in your former employer’s retirement plan, you’re simply deciding to do nothing.  The money stays there, and you monitor it there.

The upsides:

  • You continue to get the tax deferral until you withdraw the money.
  • If you are over 55 years old when you leave your job, you can withdraw money from that account penalty-free (you’ll still pay taxes) so long as you keep the money there.
  • You may have access to low-cost funds or special products as investments.
  • Employer plans might have greater protection than an IRA if you get sued.
  • If you have company stock in the plan, you can use the net unrealized appreciation rules to get favorable tax treatment.

The potential downsides:

  • Remember that low-cost investment options do not always equal good quality options. Employer retirement plans are notorious for having limited and poor investment options.
  • If you have a loan balance, you might have to pay it off or pay taxes and penalties on the balance.
  • You will likely not get full benefits as you did as an employee. You typically can’t contribute to the plan, you may not be able to borrow against the funds, etc.
  • More financial “clutter.” It’s easier to get global management when your money is in fewer institutions. Leaving this money here means one more thing to monitor.

The most common and worst reason I see clients leave money in an employer plan is inertia. Financial well-being includes attending to details like this. Don’t let laziness get the best of you to your financial detriment. Make a conscious decision about this money.

The very best reason to leave money in an employer’s plan is if you are 55 years old and will no longer be working for a paycheck. This is particularly true for all 457 plans, regardless of age. You will have access to that money penalty-free. You will pay taxes. Generally speaking, do not roll it into an IRA unless you are over 59 ½ years old.

The biggest mistake I see people make is leaving the money in the employer plan because they think the fees are low. They are frequently wrong about that. Employer plans are touted as easy, inexpensive vehicles to save money, and the devil is in the details. Large employers (over 10K employees) may have low fees (less than 1%), but it’s not uncommon for small employer plans (3K employees or less) to have fees in excess of 2%. The amount of fees any individual participant pays can vary widely, particularly high-level employees in small companies. A colleague discovered that her client, who had $1M invested in a $15M plan was one of 250 employees but was paying 1/15th of plan expenses. Do your research. Go get the Annual Participant Fee Disclosure Form. Do the math. What are you really paying? And is the value really there? What other services might you get for the same amount?

#2: Roll the assets into an individual retirement account (IRA).

With this option, you are choosing to move the money from your employer’s plan into an IRA, typically at another institution. If you already have an IRA, that employer plan money can put into that same IRA. No need for another account.

The upsides:

  • You continue to get the tax deferral until you withdraw the money.
  • You typically get better investment options.
  • You reduce your “financial clutter” – you can consolidate your accounts, get better global management and monitoring.
  • You can get additional services. If you’re working with a dedicated financial planner, you typically get investment advice, planning, and management services for the same or less cost.

The downsides:

  • You typically can’t borrow against the funds.
  • You will pay penalties on withdrawals before age 59 ½.
  • Potential conflicts of interest if your financial planner benefits financially. Of course, this is also true for the fiduciary of your former employer’s plan.

There are so many opportunities now to move funds into an IRA at respectable institutions, get a little advice, and get better investment options, all for a reasonable cost. Again, you’ll want to do your research — investigate the investments at your former employer’s plan, the fees (get the Annual Participant Fee Disclosure Form), the available services.

#3:  Roll the assets into your new employer’s plan. 

In this option, you take the money from your former employer’s plan and roll it into your new employer’s plan, if that plan allows for such transfers and most seem to these days.

The upsides:

  • You continue to get the tax deferral until you withdraw the money.
  • Reduction of “clutter” – you can consolidate your accounts, get better global management and monitoring.
  • Potential to avoid required minimum distributions if you are 72 years old or older.

The downsides:

  • The new employer’s plan will likely have restrictions on what you can do with those rolled over assets, such as whether you can borrow against them or withdraw them.
  • Investment choices may not be attractive.

The main reason I see people choose this option is because they think it’s easiest. For those more than 10 years from retirement, this may make a lot of sense. Just watch the investment options, the fees, and the services that you get. Again, for the same cost, you might be better off with a financial advisor who can give you better advice and investments for the same cost.

#4:  Take a distribution in cash from the plan. 

If you choose this option, you will pay taxes and any applicable penalties if you’re under 59 ½ years old, and you will put cash in your pocket.

The upsides:

  • You get cash.

The downsides:

  • No more tax deferral.
  • No more loans.

This option is rarely used, as most people don’t want to pay taxes or penalties. For very small accounts owned by people over 59 ½ years old who need the money, this option often makes a lot of sense.

Next Steps

You want to do a side-by-side comparison of your options and decide what works best for your particular circumstances. A financial planner can help you do this. That person will have a handy comparison tool and a disclosure for you to sign.

Warning: Be careful about that tool and that disclosure. The financial services industry has hidden fees and pulled the wool over the public’s eyes for hundreds of years. Don’t think it has somehow stopped because the Department of Labor finally got its regulation passed. So many of these disclosures I have seen only speak to the option of moving money into an IRA to the benefit of the advisor. You want to make sure it’s even more to your benefit. Or pick another option.

If you want help with your decisions, please reach out.


Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Your partner for financial peace and clarity

Join Our Email List

By submitting this form, you are consenting to receive marketing emails from: Lanning Financial. You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

admin [at]

By appointment only:
100 Pine Street, Suite 1250
San Francisco, CA 94111

Disclosure – Lanning Financial Inc. is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Lanning Financial Inc. and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Lanning Financial Inc. unless a client service agreement is in place. / Lanning Financial Inc. provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Lanning Financial Inc. is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.

2024 © Lanning Financial Inc. 

Copy Protected by Chetan's WP-Copyprotect.