A reader sent me a note asking for ideas on moving to a new job after working for the State of Colorado, where the retirement plans are run by an organization called PERA. PERA works sort of like a pension plan and sort of like a 401(k). Read the question, and my answers, below.
Basically what is happening is I was a State of Colorado employee for 4 years and 10 months and I'm moving to New York for graduate school. With the state of Colorado I had a retirement account through PERA. I have tried talking to them and asking them questions and they don't really help so I'm hoping you can answer some questions?
1. An employee isn't vested until 5 years, so I will be 2 months shy. However, I don't see myself ever working for a PERA employer again or if I do it will be a loooonnngg time from now. I only have 2 months after terminating employment to withdraw and/or roll-over my account so I think I have chosen to do that. Do you think that is a good decision if I don't think I will ever work for CO again or is it better to leave it in?
2. I don't want to withdraw because I don't want the huge taxes. I want to roll over into an IRA, but don't know if I should do traditional or Roth? What are the benefits of each/which would be better for someone our age to do?
3. What are good companies to go with for my IRA? This will be my first retirement account outside of an employee plan (I know…I know…but at least I'm trying to be responsible now and not just take the money and run?!) so I want to make sure I go with a legitimate company but have no idea where to start? I do my banking through Chase and Wells Fargo, but have heard it's not a good idea to have all accounts at the same place. Is this true?
Those are some very good questions. I’ll hit them one by one.
Dealing With Partially Vested Accounts
For the uninitiated, vesting is a process where you get a portion of your retirement or stock benefit granted to you for each year you work somewhere. In some situations, you get everything at once when you leave. In others, you get a portion each year.
In this situation, I suggest staying with the employer for the extra two months if possible. Depending on where you are going, that might not be an option. But remember, if you leave now, the entire unvested portion that you earned is gone.
What to Do With the Balance
The best idea when you leave is to take your balance and do an account rollover to an IRA. As the reader notes, if you just withdraw the money, you pay a big tax penalty. Your penalty is the taxes you owe plus an extra 10%. For an average worker in their 20s-40s, that will probably amount to 35% of your balance going to the IRS.
Instead, you can do an account rollover where the balance is sent to another tax advantaged account. Once your rollover, you can just put your money in a target date fund (a mutual fund with an investment strategy based on age) and just not worry about it and let it grow.
When you do a rollover, it is easiest to keep it in the same tax status as the retirement account. Some companies allow Roth 401(k) plans where you contribute after tax dollars. In that case, it is easiest to roll into a Roth IRA. If your contribution was with pre-tax dollars, it is easiest to keep it in a regular IRA. That doesn’t mean you can’t convert to a Roth, but if you do you have to pay taxes on the pre-tax balance you are converting which has the potential of bumping you to the next tax bracket.
Where to Take the Funds
When I first left an employer and had funds to rollover, I already had an investment account at Charles Schwab, so I took my funds there. For anyone that doesn’t already have a favorite stock brokerage, Vanguard is my favorite suggestion.
Vanguard has lots of mutual fund options with some of the lowest costs in the industry. The easiest way to invest, as I mentioned above, is in a target date fund for someone your age. I am in the Vanguard Target Retirement 2050 Fund (VFIFX) for most of my retirement cash. I also have some in an S&P 500 fund and some other funds to add extra diversity. But, for most people, something like VFIFX or the equivalent for their age is a great option.
You are probably best taking your funds somewhere other than Chase or Wells Fargo. While they do have brokerage services, they are not the cheapest option out there as far as investment trading fees. Any discount brokerage such as eTrade, Fidelity, or Charles Schwab is probably a better option for your needs.
What Would You Do?
What would you do in this situation? Where would you take your funds and invest? Share your ideas in the comments.