In my experience, retirees are often confused regarding whether or not to leave money in their former employers plan or roll it to an IRA. The answer of course is never a simple one because there are several factors to consider based on your personal situation. Here is a list of a few considerations to help make that decision easier.
- Investment Choices- in an IRA, you have nearly unlimited choices in what you can invest the funds in vs. a limited menu in the company plan. This is often the #1 argument for rolling out the funds. Personally, I don’t want to leave money with a former employer. This is especially true when you don’t retire from that employer but simply change jobs. I want control of my money and don’t want it affected every time the company decides to change plan providers, etc.
- Beneficiary flexibility- This may be very important to individuals in 2nd or 3rd In a company plan, your spouse IS your beneficiary unless they sign off agreeing to let you name another person, like children from a previous marriage. Be careful, even if a future spouse waived those rights in a prenuptial agreement, the day you get married that part of the agreement no longer applies! Only a spouse can waive that right, and a fiancé signing a prenup is not a spouse when they sign it, therefore they never really gave up that right. If your plan is to leave the money to your kids, you might want to consider rolling it to an IRA first before you get married. In an IRA, you can name anyone as your beneficiary. Also, some company plans will NOT allow you to name as trust as a beneficiary of your plan. Yes, the plan not your estate documents control this. If the plan document doesn’t allow for it, then you can’t do it!
- Do you need the money? – If not then money might be better left inside a company plan if you are still working. As long as you are an active employee in an active plan you can take advantage of the still working exception to required minimum distributions (RMDs). Under the exception, the money in the plan does not have to be factored in to the calculation for your RMD meaning you are required to take out less money. There is no exception for IRAs.
- College Planning- If you intend to use some of your qualified funds to pay for college, not my favorite idea by the way, you are much better off with those funds coming out of your IRA than your company plan because the IRA allows for an exception to the 10% penalty which applies when you take money out of a retirement plan before age 59 ½. Any money you take out will still be taxable as ordinary income, but just not subject to the 10% penalty like it would be from a plan.
- Creditor Protection- Funds inside of an ERISA plan have more creditor protection than they do inside of an IRA. The IRA may provide protection in the case of a bankruptcy, and only up to certain limits but not necessarily beyond that.
- 72t (the age 55 exception) - If you retire before age 59 ½, there is a way to take money out of your company plan without paying the 10% penalty for early withdrawals. This can be fairly complicated so I won’t go into much detail, and I strongly suggest you see your CPA before doing this. As long as you take the funds out in “substantially equal payments” over 5 years or until age 59 ½ (whichever is longer), you may be exempt from the penalty, but this only applies to plans, never to IRAs!
- Fees- Lastly, don’t forget to compare the fees in your company plan (not always easy to do) vs. the fees in your IRA. Fees ultimately affect performance, so all things being equal, even though they rarely are, the lower the fees the better.
This certainly isn’t a complete list of considerations, but hopefully it helps you make a more informed decision about what to do with your money once you leave your job or retire.
Frequently Asked Questions About Leaving Money In a Company Plan or Rolling To an IRA
1. Should I leave my retirement money in my company plan or roll it into an IRA?
There’s no one-size-fits-all answer—it depends on your goals and situation. Key factors include investment options, fees, access to funds, beneficiary preferences, and whether you’re still working.
2. What is the biggest advantage of rolling into an IRA?
More control and flexibility. IRAs offer a much wider range of investment choices compared to the limited options in most employer plans. You also have more control over how your account is managed over time.
3. Are there situations where staying in a company plan is better?
Yes. For example:
- If you’re still working, you may be able to delay required minimum distributions (RMDs)
- Company plans may offer stronger creditor protection
- You may have access to special withdrawal strategies (like early retirement exceptions) that IRAs don’t offer
4. What should I compare before making a decision?
Before deciding, you should evaluate fees, investment options, withdrawal rules and penalties, and your need for flexibility or access to funds. Working with a financial professional can help you weigh these factors and choose the best option for your situation.