Leaving Your Job? Time to Review Your Retirement Savings Plan OptionsSubmitted by MIRUS Financial Partners on December 15th, 2017
Are you leaving your job and considering whether to take a distribution from your 401(k), 403(b), or governmental 457(b) plan? if so, make sure you've considered all your options.
You have four options when you're eligible to receive a distribution from your employer retirement savings plan.1
Option 1: Leave the money in the plan
This is the easiest option — you don't do anything at all.
- You’ll get continued tax-deferred growth (or potentially tax-free growth in the case of Roth accounts).
- While IRAs typically provide more investment choices than an employer plan, there may be certain investment opportunities in your particular plan that you can't replicate with an IRA.
- You can receive penalty-free distributions as early as age 55 (50 for qualified public safety employees) compared with age 59½ for IRAs.
- Qualified plans generally provide greater creditor protection than IRAs.
Note: This may not be an option if your vested plan balance is $5,000 or less; if you've reached your plan's normal retirement age; or if the payment is a required minimum distribution. Consult your plan's terms
Option 2: Take the distribution in cash (and securities if applicable)
Most plans allow you to take a lump-sum distribution of your account balance. You close out the account and take the money without rolling it over to another retirement account.
- If you deplete your retirement plan, you risk not having enough money at retirement to cover your expenses.
- All or part of your distribution may be subject to federal (and possibly state) taxes, and the taxable portion may be subject to an additional 10% early distribution penalty tax if you haven't reached age 55 (50 for qualified public safety employees); this may significantly reduce the amount you'll actually receive.
- You'll lose the benefit of continued tax-deferred (or tax-free) growth.
Note: If your distribution includes employer stock or other securities, special tax rules may apply that can make taking a distribution more advantageous than making a rollover. Consult a tax professional.
Option 3: Roll the funds over to a Traditional IRA
- Your funds continue to have tax-deferred (or tax-free) growth
- In most cases, you’ll have more investment choices with an IRA than with an employer plan.
- You can freely move your money among the various investments offered by your IRA trustee, and you can freely move your IRA dollars among different IRA trustees/custodians (using direct transfers).
- With an IRA, the timing and amount of distributions are generally at your discretion (however you must start taking required minimum distributions from traditional IRAs at age 70½).
- No required distributions must be made from Roth IRAs during your lifetime.
Option 4: Roll the funds over to your new employer's plan (if the plan accepts rollovers)
- Rolling over to a new employer has all of the advantages of Option 1, above.
- Moving money into your new account consolidates you employer plan retirement savings.
- New employer plans may offer new benefits. For example, you may be eligible for a plan loan, and you may be able to delay required distributions beyond age 70½.
Should you rollover your retirement fund?
You need to weigh all of the factors and make a decision based on your own needs and priorities.2 When evaluating whether to initiate a rollover, always be sure to:
- Ask about possible surrender charges that may be imposed by your existing employer plan, or new surrender charges that your IRA or new plan may impose.
- Compare investment fees and expenses charged by your IRA (and investment funds) or new plan with those charged by your existing employer plan (if any).
- Understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan. It is best to have a professional assist you with this, because the decision you make may have significant consequences — both now and in the future.
Keep in mind that you don't have to roll over your entire distribution. You can roll over whatever portion you wish. If you roll over only part of a distribution that includes taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution.
1 Special rules apply if you're the beneficiary of a plan participant.
2 If your distribution is eligible for rollover, you'll receive a statement from your employer outlining your rollover options. Read that statement carefully. You cannot roll over hardship withdrawals, required minimum distributions, substantially equal periodic payments, corrective distributions, and certain other payments.
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Mark A. Vergenes is President of MIRUS Financial Partners, 110 E. King St., Lancaster, PA. 717-509-4521 or email@example.com Investment Advisor Representative offering securities and advisory services through Cetera Advisor Networks LLC., member FINRA/SIPC. Cetera is not affiliated with any other named entity. Neither MIRUS Financial Partners nor Cetera Advisor Networks LLC. give tax or legal advice.