When changing jobs there are a million things to take care of – dealing with insurance, notifying people in your Rolodex and getting ready for new challenges. Although is a busy time, one important consideration is what to do with your employer-sponsored retirement plan. While there are several things you can do, it’s important to look at the benefits and consequences of each alternative. Let’s look at the four basic choices:
Roll assets into an IRA. If you are changing jobs, rolling your employer-sponsored retirement account assets into an IRA is usually the best option. Rolling your assets lets you retain the funds’ tax-deferred growth potential and gives you access to the money if needed. This feature may come in handy especially if you are leaving due to a layoff and need to access the funds.* If you leave your retirement plan assets with your former employer, you may find you are unable to make withdrawals. Instead, at retirement, distributions may be paid in a predetermined schedule outlined in their plan. An IRA provides the flexibility to determine how much income you’ll need and you can take withdrawals anytime.
Cash out. Many people feel they should take the money out of their employer-sponsored retirement plan when changing jobs, but they may be paying unnecessary income taxes by doing so. Even if you need to use your savings for income at the time, you should consider the consequences of liquidating your former employer’s retirement plan. You may switch jobs several times in your lifetime and cashing out every time, may eventually erode your retirement savings which can jeopardize your financial security. Another consideration is the income taxes you may owe on the withdrawn amount*. Cashing out should be viewed as a last resort.
Leave your assets in your former employer’s plan. Leaving your assets in a former employer’s plan may seem like the easiest alternative. It requires no action from you but there may be some consequences later on. First of all, your former employer controls when and how you access your savings in the future. In addition, you will need to keep track of each plan, their different rules and their location. This may become cumbersome if you have assets in several plans.
Move assets into a new employer’s plan. You may be able to move your retirement plan assets into your new employer’s plan. The government has removed many barriers that previously made it difficult to transfer funds from one employer to another. Now you can transfer funds from plan to plan even if they are not the same (ex: from a 457 plan to a 401k plan). You do, however, need to check if your former and new employer’s plans permit the transfer. While this will help keep your funds in one location, you’ll be limited to your new employer’s plan so make sure the rules will work well for your financial situation.
As you can see, there are several options for you to consider and your financial consultant can help you see the advantages and disadvantages of each one. If you would like to receive the publication, Changing Jobs or Retiring? Make the Right Choice for Your Retirement Plan, please contact financial consultant, Shelley Phillips-Mills in Bangor at 800-947-5456.
*withdrawals prior to age 59 ½ may be subject to a 10% IRS penalty and regular income taxes.
This article was provided by A.G. Edwards & Sons, Inc. Member SIPC.