Keeping Your Retirement Savings On Track Amid The Great Resignation

In May 2021, psychologist Anthony Klotz coined the phrase “The Great Resignation” to describe the record amounts of workers quitting their jobs after reevaluating their roles during the pandemic (cnbc.com, January 2022). Last year, on average, 3.98 million workers quit their jobs each month, the highest average on record since the Bureau of Labor Statistics (bls.gov) began tracking the information in 2000. (In comparison, the lowest monthly average was in 2009, with around 1.75 million workers quitting monthly.)

Many workers are changing jobs to seek higher pay, starting their own companies, or are in search of a better life/work balance. Others may be retiring or leaving the workforce altogether. If you’re one of the estimated 47 million people who quit their jobs last year, no matter your reason, keeping your retirement savings on track after your career transition should be a priority. (cnbc.com, February 2022)

If you’re changing jobs:

First things first: Determine if your new employer offers a 401(k) plan with company match. If so, make sure you’re taking advantage of that as soon as possible so you aren’t leaving any free money on the table. Many employers are improving their 401(k) benefits to attract talent, so review your plan’s provisions carefully and take advantage of what’s being offered. If your new company does not offer a 401(k) plan or you’d like to contribute beyond your 401(k), look in to opening an individual retirement account (IRA) to ensure that your retirement savings continue to grow while you’re in your new position. If you have opened your own business, you have other options to consider, such as an Individual 401(k) account for the self-employed or SEP or SIMPLE-IRAs for small business owners.

Next, you need to decide what to do with your 401(k) with your previous employer. You generally have four options, three of which can preserve the tax benefits of your savings to help you build wealth over the long term:

1. Leave your assets where they are

If the plan allows, you can leave the assets in your former employer’s 401(k) plan, where they can continue to benefit from any tax-advantaged growth.

2. Roll your assets into a new employer plan

You could roll your old 401(k) account assets into your new employer’s plan (if permitted) to maintain the account’s tax-advantaged status. If you have Roth assets in your old 401(k), make sure your new plan can accommodate them.

3. Roll over your assets to an IRA

Rolling assets into an IRA will grant you greater flexibility over access to your savings (although income taxes may apply, along with early withdrawal penalties, if you are under age 59½). Before-tax assets can roll over to a Traditional IRA while Roth assets can roll directly to a Roth IRA.

The fourth option is to cash out your account, which we would suggest avoiding, if possible. Cashing out your old 401(k) may have significant financial consequences. Not only are those funds considered taxable income and subject to an immediate 20% tax withholding, but you may also be subject to a 10% early withdrawal tax penalty if you cash out before age 59½, which will leave you with only 70 cents on the dollar of your hard-earned savings and cause you to lose subsequent tax-deferred growth opportunities.

For all your options, please consider fees and expenses, available services, protection from creditors, and special tax considerations for employer stock.

Retirement/leaving the workforce:

If you or your spouse has left the workforce for retirement or otherwise, it is a good idea to take time to reassess and reevaluate your retirement savings strategy, as the role of saving may have shifted primarily to one spouse.

Consider a spousal IRA

The most important role spousal IRA contributions can play in a retirement savings plan is enabling a nonworking spouse to keep accumulating their own retirement savings during the period when they are out of the workforce.

While spousal IRA contributions are most seen in situations where one spouse is out of the workforce raising the children, they can also be used when one spouse retires ahead of the other.

A working spouse with earned income can continue to contribute to the retired spouse’s IRA, taking advantage of a few additional years of saving.

It’s also a way to continue to fortify the overall household’s retirement savings by contributing to an IRA in your spouse’s name in addition to one in your own. This approach doubles the contribution amounts, potentially to $12,000 or more, and allows the couple to take advantage of contributions that may be tax-deductible. (The 2021 and 2022 IRA annual contribution limits are $6,000 plus an additional $1,000 catch-up contribution if the account owner is age 50 or older.)

Spousal IRAs are not considered a joint account, but a separate IRA opened, and owned, in the name of the nonworking spouse (or contributing to an IRA already established). To be eligible, the couple must be married and file their taxes jointly. Their combined earnings must be equal to or exceed their combined IRA contributions, up to the annual contribution limits.

At retirement

Generally, investors roll the assets from their workplace plan into an IRA at retirement. An IRA typically provides greater account flexibility and more investment options to choose from. However, some 401(k) plans may also provide distribution flexibility and may have access to institutional pricing offering low-cost investment options.

Consider these three questions if you’re considering keeping assets in your company plan:

1. Does your 401(k) allow partial distributions?

If your plan allows partial distributions, you may find it convenient to leave your assets where they are. However, if your 401(k) plan instead requires you to take a lump-sum distribution or specific periodic payments, a rollover IRA could provide substantially more flexibility by allowing distributions, generally, to be taken at any time.

2. Does your 401(k) include Roth assets?

If you have both before-tax and Roth contributions in your 401(k) plan, you’ll need to consider the distribution rules. Many plans may have specific requirements on the order of distributions. If you have a Roth and/or Traditional IRA, you have more flexibility around when you can take account distributions. Keep in mind that while required minimum distributions (starting April 1 the year after you turn 72) do not apply to Roth IRAs, they do apply to Roth assets in a 401(k) account.

3. Does your 401(k) have the best investment options for your situation?

Evaluate and compare the investment options available in your employer plan versus those available through an IRA. If you are satisfied with the investment options you have, you could consider leaving your assets in your plan.

Please note: If you hold a substantial amount of company stock with net unrealized appreciation, it’s particularly important to take tax considerations into account when planning your retirement withdrawal strategy. Seeking the help of a tax professional would be advisable.