Changing jobs is an important decision – one many of us are making more often. Once you’ve decided to switch jobs, your next move is to determine what to do with the money in your former employer’s retirement plan.
Four common options
Generally, you have four options for handling the money I your account:
|Keep the money in your former employer's plan||
If your former employer permits, leaving your money where it is may be an attractive option because it allows you to continue enjoying the benefits of tax-deferred compounding. If you’re happy with the plan’s investment options, this could be a good choice. On the downside, there may be special conditions or fees associated with your continued participation, and you may have withdrawal restrictions in the future
|Roll the money into your new employer's plan||
This option also has its advantages – continued tax-deferred growth of your investment and the convenience of having all your retirement assets in one place. But because every employer has its own rules governing rollover money, review your new employer’s plan and possible eligibility restrictions carefully before choosing this option
|Take the money in cash||
While this option may seem appealing because it gives you immediate access to your money, Uncle Sam is the real winner here. Cash distributions are subject to a mandatory 20% federal withholding in addition to regular income tax. Furthermore, if you’re under age 59½, your distribution would also be subject to a 10% additional federal tax. Finally, if state or local taxes apply, they could claim an even bigger portion of your account
|Roll the money directly into an IRA||
This final option allows you to roll all or a portion of your money into an individual retirement account (IRA). To avoid withholding taxes and potential penalties, arrange for a direct rollover of the entire amount into an IRA. An IRA offers the same potential benefits of tax-deferred investing for retirement and typically provides a wider range of investment options to choose from. However, additional fees or commissions may apply
The money you accumulate through an employer’s plan may become a primary source of income after you retire, so how you manage it today could have a big effect on your financial situation in the future.
Source: LPL Financial