What happens to my retirement plan if I change jobs?

What to expect when you leave your job

When you leave your employer, you’ll get a statement or letter that will tell you what your options are for the money in your plan and if you need to decide by a certain date. It will also tell you any rules that apply that affect how much you can take with you or what you can do with it. For example:

• Vesting rules—Tell you if you’ve worked for your employer or participated in your plan long enough to be entitled to employer contributions
• Locking-in rules—Affect what you can and can’t do with the money before you retire
• The commuted value of your defined benefit (DB) plan—Tells you much your plan would be worth if you transferred the money out today

Once you look over your options, think about what this change means for your goals. Since you’re not ready to retire, you likely want to continue saving, so that should be your focus. On the other hand, if you’re leaving your job to start a new business, or if you’re still thinking about what to do next, you may need to revise your strategy. 

Understanding your options

Depending on your plan, your options for your vested money could fall into one or more of these general categories:

• Move it and continue saving for retirement
• Park it until you use it for retirement
• Cash it and take the money 

Let’s look at each one.

Move it and keep saving

If your goal is to continue saving for retirement, you’ll want a plan that lets you maximize your saving opportunities, free of taxes, a plan you can contribute to, lets you benefit from compounding interest, and offers a wide range of investment options at advantageous fees. 

Possible options include moving your money to:

• Your new employer’s group plan—If they offer one and if they allow transfers, your money stays tax deferred when you transfer it, and you continue to enjoy the advantages of a group plan. 
  
• A similar plan with your current employer’s plan provider—If this is available, it may be one of the easier options. The provider can move your money to a plan with similar investment options and services with investment management fees that may be lower than for individual plans.
• A plan at another financial institution—You can transfer money that’s not locked in to an individual Registered Retirement Savings Plan (RRSP) at a financial institution of your choice. Keep in mind that fees and expenses may be higher compared with a group plan.

Park it until retirement

You could keep your money sitting in a plan until you need it for retirement. The savings opportunities will be more limited, as you won’t be able to contribute to it.

Here is how you can park it:

• Leave it where it is—If plan rules allow, you can leave your money in your current employer’s plan. It’s an easy option, as there's nothing for you to do, but keep in mind:
  
  • Neither you nor your employer can contribute to the plan. 
  • You might be charged higher administration fees, so check with your employer. 
  • You’ll need to keep your information up to date with the plan administrator or plan provider for when it’s time to get your benefit. 
• Transfer it to a locked-in account—A locked-in retirement account (LIRA) or a locked-in RRSP at a financial institution are tax-sheltered plans offered by financial institutions where you can keep any locked-in money from your employer’s plan until you retire. You can’t contribute to a LIRA or a locked-in RRSP, but you can control how your money is invested, so be sure to research investment options and fees.
• Purchase a deferred life annuity—This will start paying you a guaranteed income once you’re ready to retire. Your money won’t grow, but you’ll know how much you’ll get from that source.

Cash it and take the money

You have the option of taking your non-locked-in money as cash. Just be sure to understand the costs and impacts of cashing out your retirement savings early.

• Taxes—You’ll immediately pay a withholding tax on the money you take based on how much you’re taking and where in Canada you live. The amount you take gets added to your taxable income for the year, so you may pay even more tax on top of the withholding tax.
• Losing tax-sheltered compounding interest—You lose the benefit of earning money on money tax free. 
• How it affects your retirement goals—You’ll be putting a dent in your retirement savings, making it harder to reach your goals.

Keep your goals in sight

As you get ready for your new challenge, take the time to think about your retirement plan. You’ve worked hard for that money, and the option you choose should be one that aligns with your needs and goals. If you need help, get advice from your financial advisor, and take advantage of the services of transition specialists that your employer’s plan provides.