Wealth Management Services* - Tips for Transitions: Make the Most of Your Retirement Account Options

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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.

To learn more about how a financial plan from SEFCU Wealth Management Services* might help you onto the road for financial fitness, contact us at [email protected] or call 518-451-2948.

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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.

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