Smart Ways to Protect Your Retirement When Switching Jobs

There's a certain kind of rush that comes with starting a new job. It may be due to a better salary, a fresh title, or just a step in the right direction.

But here's what doesn't always make the onboarding checklist: what happens to the retirement savings you've built so far? A job transition is a pivotal moment to realign your long-term financial strategy.

The choices you make now will shape how confidently you approach the next chapter of your life. Let's talk about your retirement savings plan and how to make decisions like opting for a 401k rollover when changing jobs.

4 ways to protect your retirement when switching jobs

The decision you make regarding your retirement savings will depend on your personal financial goals. Here are four common routes people take.

Leave it with your former employer

Sometimes, doing nothing is still a decision. If you have at least $5,000 in your retirement plan, many employers will let you keep the account open even after you've moved on.

If your former employer offers a solid retirement plan with low fees and well-performing investment options, this can be a reasonable short-term choice.

A limitation of this choice is that you'll no longer be able to contribute to the plan. It can also be messy to manage multiple retirement accounts across old employers.

If you're going down this route, watch out for maintenance fees some plans impose for ex-employees. Others may have limited investment lineups or outdated fund options. If you're unsure whether it's still working out for you, check out other options available.

Roll it over to your new employer's plan

Another option is a 401k rollover when changing jobs. You can consolidate your retirement accounts under one plan to streamline savings.

Consider this option if you want a single account that's easier to track and optimize over time. Plus, it may open up the ability to take loans against your balance, depending on your new plan's rules.

Since not all plans accept rollovers, you need to check with your new HR or plan administrator early. You may also have to wait until you're officially enrolled in the new plan, which is often a 30 to 90-day probation period.

Before you roll over, compare investment choices between the two plans. For example, if your old plan offered a target-date fund with a 0.10% fee and your new one's equivalent fund charges 0.50%, it could cost you thousands over time.

Roll it over to an IRA (Individual Retirement Account)

Rolling over your retirement plan to an IRA offers the most control. You get to choose where to open the account and how to invest the money. Plus, you can decide to manage the account yourself or bring in a fiduciary advisor.

If you don't want to be limited to the funds your employer picked, this is the best option. You can invest in low-cost index funds, ETFs, or even explore options like socially responsible investing or bond ladders if that aligns with your goals.

Another advantage of IRAs is that they offer lower fees compared to some employer-sponsored plans, especially if you select passive investment strategies. If you've had multiple jobs and plans, rolling all of them into one IRA can simplify your financial life.

On the flip side, rolling over to an IRA means you lose loan access and some legal protections that are specific to employer-sponsored plans. Transferring funds directly from an old plan to an IRA provider, known as a direct rollover, is a method that can help avoid taxes and early withdrawal penalties.

Cash it out

It might be tempting to cash out your retirement savings, but it's rarely a smart idea. While you get immediate cash, you sacrifice the compound growth that helps you builds long-term financial security.

Cashing out your money only makes sense if you're facing a financial crisis and have depleted all other options. One extreme example would be if you're facing eviction and need cash quickly to secure housing. In this event, it may make sense to cash out your retirement savings.

In most other cases, you're hit with a lot of costs like early withdrawal penalty, federal taxes, income taxes, and total immediate loss. If you leave the money invested, it has the potential to grow significantly over time through compound interest. This means your savings can increase not just from the original amount you contributed, but also from the interest that builds on itself year after year.

How to decide on a retirement strategy when changing jobs?

When making the decision of what to do with your retirement savings, start with your balance. If it's under $5,000, your former employer might automatically move the funds or cash them out. So, act quickly.

Then, compare your investment options and fees. Look at what your old plan offered, what the new one allows, and what you'd get in an IRA. Even a 0.50% fee difference can cost tens of thousands over time.

If you anticipate needing flexibility, rolling it into your new employer's plan may keep that option on the table. This way, you get loan access when you need it. More importantly, weigh convenience against control. Employer plans are easy to maintain but often limit investment choice, whereas IRAs offer full autonomy but require more engagement.

Common mistakes to avoid

Here are some common mistakes to avoid in your decision-making process.

• Taking cash distributions unnecessarily: Withdrawing your balance is a quick win only. It later triggers taxes, penalties, and long-term financial setbacks.

• Missing rollover deadlines: If you take a distribution and don't complete a rollover within 60 days, the IRS treats it as income. It results in taxation and a 10% early withdrawal penalty if you're under 59½.

• Poor research: Every plan is different, so you need to research a new employer's offering thoroughly. If you skip a side-by-side review of fees and fund choices, you may miss opportunities.

More importantly, do not forget about old accounts. Consider consolidating them to stay in control and grow your savings.

Final steps

There are a few focused actions you need to take to protect your retirement during a job change. Contact HR teams at both your former and new employers to understand your options. If you're considering an IRA, research providers that align with your investment goals.

Gather all account statements and documents and set a clear timeline to avoid delays or penalties. A little planning right now can result in stronger financial confidence later.