Changing jobs? What are you going to do with your retirement savings? Think about this:
American workers change jobs fairly frequently. For instance, the youngest baby boomers held an average of more than 11 different jobs before the age of 48.1 The decisions you make about how to manage retirement assets when changing jobs can have a direct impact on your future financial health.
"Cashing out" retirement plan assets before age 59½ (55 in some cases) can expose your savings to immediate income taxes and a 10% additional federal tax. On the other hand, there are several different strategies that may preserve the full value of your assets while potentially providing tax-deferred growth.
Well Informed = Well Prepared
Option #1: Leave the money where it is. If the vested portion of the account balance in your former employer's plan has exceeded $5,000, you can generally leave the money in that plan. Any money that remains in an old plan still belongs to you and still has the potential for tax-deferred growth.2 However, you won't be able to make additional contributions to that account.
Option #2: Transfer the money to your new plan. You may be able to roll over assets from an old plan to a new plan without triggering any penalty or immediate taxation. A primary benefit of this strategy is your ability to consolidate retirement assets into one account.2
Option #3: Transfer the money to a rollover IRA. To avoid incurring any taxation or penalties, you can enact a direct rollover from your previous plan to an individual retirement account (IRA).2 If you opt for an indirect transfer instead, you will receive a distribution check from your previous plan equal to the amount of your balance minus an automatic 20% tax withholding. You then have 60 days to deposit the entire amount of your previous balance into an IRA, which means you will need to make up the 20% withholding out of your own pocket.3
Option #4: Take the cash. Because of the income tax obligations and potential 10% additional tax described above, this approach could take the biggest bite out of your assets. Not only will the value of your savings drop immediately, but you'll also no longer have that money earmarked for retirement in a tax-advantaged account.
Check the background of investment professionals associated with this site on FINRA’s BrokerCheck.
1Source: Bureau of Labor Statistics, Number of Jobs Held, Labor Market Activity and Earnings Growth Among the Youngest Baby Boomers: Results from a Longitudinal Survey, March 2015.
2Withdrawals would be taxed at ordinary income tax rates. Early withdrawals may trigger a 10% additional tax. State taxes and penalties may also apply. Holdings of employer stock in a retirement plan may be subject to different tax rules.
3You would receive a refundable credit for the withholding when you file your next tax return.
Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.
Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. SEFCU and SEFCU Wealth Management Services are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using SEFCU Wealth Management Services, and may also be employees of SEFCU. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, SEFCU or SEFCU Wealth Management Services. Securities and insurance offered through LPL or its affiliates are:
Not Insured by NCUA or Any Other Government Agency
Not Credit Union Guaranteed
Not Credit Union Deposits or Obligations
May Lose Value