Changing Jobs? Don’t Forget to Protect Retirement Savings
What should you do with a retirement account you had with a former employer? Consider one of these four options.
In today’s job market, change seems to be the only constant. Gone are the days when employees devoted their career to one company and left with a nice pension and a gold watch. It’s now more common for workers to transition between jobs throughout their lives. In fact, the Bureau of Labor Statistics reports that people born between 1957 and 1964 held an average of 11.7 jobs from ages 18 to 48.*
Whether you’re leaving your current job due to cutbacks, a career opportunity or retirement, you may be sitting on a chunk of savings that you’ll want to take with you. If you’ve been contributing to a 401(k) or 403(b) retirement account, you have several retirement saving options for handling that nest egg. It’s important to weigh the potential pros and cons of each.
Roll your assets into an IRA
To help keep your retirement savings growing, you can roll the money into an individual retirement account (IRA).
Benefits: Your money remains invested and is able to grow tax-deferred, avoiding any withdrawal penalties, and you can continue making contributions. With an IRA, you may expand your investment choices beyond those offered in the employer-sponsored plan, and you won’t be subject to the plan’s rules or restrictions. You can also streamline your savings by combining and consolidating numerous retirement accounts into one IRA.
Drawbacks: While some companies allow employees to borrow from their 401(k), that option is not available for an IRA. Also, cashing out before opening the IRA could trigger income tax penalties if the assets aren’t transferred within 60 days. You should be aware of the expenses of each option, since a larger plan may have access to investment options that are less expensive than those available through a rollover.
Transfer your account to a new employer’s plan
If you’re changing jobs, your new employer may offer a plan that will accept a transfer from your former employer’s plan.
Benefits: Your assets are conveniently consolidated with one provider, and the money that accumulates continues to be tax-deferred. Additionally, transferring your assets directly to another retirement plan avoids possible withdrawal penalties.
Drawbacks: Your new employer could have restrictions and might not accept rollovers from certain types of plans. There also may be a required waiting period before you can transfer to the new plan. Your investment options will be limited to those offered by the new plan, and you’ll be subject to new investment, exchange and withdrawal rules.
Remain in your current plan
You could decide to take no action at all.
Benefits: Your money continues to grow tax-deferred and you avoid possible withdrawal penalties. If you wish, you can keep your assets in the same investments.
Drawbacks: You can’t make additional contributions to this account if you are no longer an employee. Plan restrictions and rules still apply. If your balance is $1,000 or less, your former employer may have the option to automatically cash out your account if you haven’t made other arrangements within a certain time period. Depending on the terms of the plan, an account with a value between $1,000 and $5,000 could be rolled into an IRA selected by your former employer, not you.
Cash out your savings
You can cash out your retirement account balance, but you would miss out on the long-term potential for tax-deferred growth offered by employer plans and IRAs. Because your retirement account has been growing tax-deferred, withdrawing the money for any other purpose will often trigger tax penalties.
Benefits: Cashing out could provide money needed for immediate expenses.
Drawbacks: Your withdrawal will be fully taxable, and your employer must withhold 20% of the taxable portion of your distribution for federal income taxes. (Depending on your income tax bracket, you may owe even more.) State and local taxes may also apply, as well as a 10% early withdrawal penalty, if you are under age 55 when you leave the company.
Always consult your tax advisor or financial professional about specific rules regarding retirement accounts and rollovers to find the option that’s best for your individual circumstances.