You Can Take It or Leave It

How to Handle Retirement Savings If You Change Jobs

If you were to change jobs, would you know what to do with the money you may have accumulated in you company retirement plan? In our increasingly mobile workforce, the average American will have to answer that critical question eight times during a 40-year career. And while retirement plan assets are typically as mobile as the workers themselves, nearly 60% of people who change jobs choose to take a cash distribution, despite the potential drawbacks.

Taxes – Now or Later?
Taking a cash distribution may trigger an immediate 20% federal withholding tax, as well as a 10% tax penalty if you are younger than 59 ½. It will also mean you’ll no longer enjoy the potential benefits of tax deferral that a qualified retirement plan offers. Even small retirement plan contributions may help you pursue large financial goals when earnings are allowed to compound tax deferred over time. Fortunately, you may have several options that will allow you to maintain the tax-deferred status of your retirement plan assets:

Leave the money in your former employer’s plan. 

Your former employer is required to allow you to leave the money where it is, as long as the balance exceeded $5,000 at some point. You’ll no longer be able to contribute to the account, but you can still decide how the existing assets are invested.

Roll the money into an IRA. 

By rolling the money directly into an individual retirement account (IRA), you’ll avoid taxes that you’d incur if you took a cash distribution, and still enjoy the potential benefits of tax deferral. You’ll also have greater investment flexibility. Unlike a company retirement plan, which has a limited investment menu, an IRA gives you the freedom to select mutual funds and other securities that best suit your needs.

Roll the money into your new employer’s plan. 

By rolling the money directly into your new plan, you’ll avoid taxes that could eat away at a cash distribution. You’ll also only have one set of investments to monitor. Even if you’re not immediately eligible to contribute to the plan at your new job, you may still be able to roll the money over right away.

Make a Choice That Fits Your Goals.
If you plan to change jobs, don’t just take the money and run. Meet with your investment representative to explore alternatives and consider their potential impact on your long-term financial goals.