While rollovers are common, there are times when leaving your retirement account with your former employer may make sense.
An article from MassMutual, 3 times when leaving your 401(k) with a former employer may be smart provides some really excellent insights.
Better Options, Lower Fees
The first reason you may want to consider leaving your 401(k) behind is the possibility of better investment options and fees.
Simply put, if your new job has everything you’ve ever wanted, except a retirement account that provides you good choices and low fees, why not just leave it where it is?
Fewer options and higher fees, according to the article, are most common when moving from a large company to a smaller company, because larger companies often have the kind of assets that give them negotiating leverage to implement lower portfolio management fees.
Early Access
Another reason for keeping your account with your former employer may be the possibility of eventually needing early access to the money in your account.
If you leave your job during the year of your 55th birthday and you think there’s a decent shot you’ll need to withdraw from the money inside your retirement account prior to turning 59 ½, it’s probably best to leave that money right where it is. Or, if not all of it, at least a chunk of it because of the rule of 55.
This rule dictates that if you retire, move on, or are let go during or after the calendar year in which you hit 55, you’re permitted to take withdrawals from your 401(k) without being slapped with the dreaded 10 percent early withdrawal penalty.
But bear in mind that you’ll still owe your ordinary income tax on the money you withdraw.
Access To A Stable Value Fund
Access to a stable value fund may be another solid reason to leave your account with your former employer, this may be a particularly wise play for those who are close to retirement and want to maintain a fairly conservative asset allocation.
The reason for this is because many 401(k)s provide stable value funds that seek to maintain principal via a combination of fixed-income securities and insurance-company contracts. These insurancewrapped bond funds that maintain a stable share price and that often provide a competitive yield, aren’t available outside of 401(k)s.
Possible Downsides
The first potential downside is that you won’t be able to keep making contributions to your plan once you leave your company, which could possibly diminish your compounded growth because the account will only provide returns based on the account balance on your last day with the company.
You may also be charged a higher annual maintenance fee as a former employee.
Furthermore, you lose the opportunity to borrow from your 401(k) after you leave. Many employers permit their current employees to take loans of as much as 50 percent of their 401(k) balance, up to a max of 50,000 dollars. Generally, those loans must be paid back within five years, with interest that eventually goes back to you.
Our team recommends tremendous caution when it comes to taking a loan from your 401(k) because you may have other, better options. But the fact remains that leaving your 401(k) with your previous employer eliminates this option entirely.