Financial Considerations after A Job Transition.

Let's face it - inertia has a strong influence on our lives.  This is no less true when it comes to our jobs and the decisions we make that will determine how good or stressful our lives will be when we are closer to or past retirement age.  Most people just continue along their existing path without looking for opportunities to optimize and improve their outcomes.  Unfortunately, even when it comes to our finances and retirement savings and long-term investments this is no less true.

Sometimes events happen that can shake us out of our patterns of inertia.  This can be the result of voluntary transitions - like accepting an offer from a different employer or involuntary transitions such as a layoff or involuntary loss of a current position.

In either case, many get so caught up in the management of and stress related to the transition itself that they don’t realize that the transition may also present a golden opportunity.  If you realize it, the transition may also open a door that you can use to get to a better future, but only if you know about it and choose to take advantage

Improving Your Retirement Investments After a Job Transition

The reason that a transition can create opportunities for more retirement income and retirement security is that most employees save for retirement through workplace retirement plans such as 401 (k), 403b, or 457 plans (these names refer to specific code sections of the tax laws in the United States).

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Typically 401k plans are for employees of private companies, 403(b) plans are for employees of non-profit organizations, and 457 plans generally cover government employees.  

In spite of the different names, these plans generally work the same however, in that they allow employees to save for their own retirements by taking a portion of their income (before paying taxes) and put it aside to take care of their needs in retirement.  Some employers even match the employee contribution by contributing an additional amount on top whereas others leave it up to employees.

These plans typically provide an extremely limited menu of investment options to choose from - a menu that is determined by the employer.  Generally most employees are not sophisticated enough to select investment options that could maximize the growth of their retirement assets in these plans.  Many do not even save enough in the first place compounding this initial mistake with poor investments.

Unfortunately, most people don’t realize that the cost of inaction can be very high.  Better investment results (if you have the proper knowledge) is one of the few “free lunches” in life. 

This is due to the incredible power of compounding.  In fact with the right investments, people participating in their retirement plans can, over a long period of time, make multiples of the amount that they originally put into the plan.  Many times these plan participants can be missing out on having two or even three times the amount of money in retirement over the duration of their professional lives.

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Why to Rollover Retirement Assets to an Individual Retirement Account or IRA

In finances, it is easy to get confused over what is best (hence inertia).  This is why it is not uncommon for people who have had multiple jobs to have kept multiple different accounts spread out all over the place that are still holding some of their money put in years ago - in general this means they don’t know much about where it is, how it is being invested, how much in unnecessary fees and costs they are incurring, and how they are doing.

While these problems also exist while they are still with the prior employer, the difference after a job transition is that their savings need no longer be trapped in these old retirement plans.  Rather, the law allows them to roll the savings from all prior retirement plans over into an IRA or individual retirement plan without any tax consequences if they are careful to do it directly from their old plan into the new IRA account.

Whether you are changing jobs, retiring or looking to consolidate your assets, a roll over can be an effective and powerful way to manage and maximize your retirement assets. Investing your money to grow it over time, either on your own or with the assistance of a professional investment advisor like Ridgewood Investments to guide you through the process.

While some retirement plans allow you to rollover assets into your own individual retirement account even while you are still employed (typically only after a certain number of years of employment), most plans don’t allow you this option until after you have left the employer that sponsored the plan.

Some of the benefits of rolling over your retirement assets to your own IRA are the following:

  1. More investment flexibility and superior investment options - Because the IRA is in your own name and not that of your employer, it prevents you from being locked in with the limited investment options that the employer selected for their employees.  This provides access to more and better choices for investments into stocks, bonds, and funds that may be superior and more flexible.  Once your money is in an IRA your have an unlimited choice to build your own mix of investments including:
    • Mutual funds
    • Bonds
    • Stocks
    • EFTs
    • Private investments
    • U.S Treasuries
  2.  Simplifying your finances by consolidating your assets - By rolling over your 401(k) plan(s) from one or more prior employers into an IRA it allows for consolidation meaning it makes keeping track of your assets easier.  If your assets are spread out in multiple different places it can be much harder to track and manage them efficiently.
  3. Potentially Lower costs and access to professional advice - Some employer sponsored plans (particularly group variable annuities) have high administrative or investment costs.  Rolling over your retirement assets can allow you to make lower costs investments directly into stocks and or lower cost investment funds.  It can also allow you the option to work with a professional advisor who can give you additional investment and financial planning guidance - albeit at an additional cost to cover their time and work.

Overall, you can greatly increase the flexibility and control you have over your retirement assets by rolling over your assets when you leave a job.  Done correctly, there should be no immediate tax consequences in rolling over directly to your IRA.

If you are not sure if a rollover can be right for you, getting help from a knowledgeable advisor can be a good idea.  Unfortunately, handling a rollover incorrectly can lead to a significant tax penalties and a loss in the value of your retirement funds so it is critical to research and do it correctly.  On the other hand, rolling over retirement assets to your IRA and using the advantages of the IRA structure correctly can greatly increase your options for a worry-free and comfortable retirement.

About the Author

Kaushal “Ken” Majmudar, CFA

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.