Reevaluating Your Retirement Plan Before Leaving A Job
Are you on the verge of leaving your job and wondering what you should do about your retirement plan? With at least four options to choose from, the decision can be overwhelming. It’s imperative to take time to think about life after retirement so you can make the best decision. Here are some ideas of what you can do with your retirement plan before leaving a job.
1. Transfer your current plan to your new employer’s plan
If you’re still young enough to work and have another job lined up after you leave your current one, you may want to simply transfer your retirement plan. This employer-to-employer transfer of your plan can be done directly. Associated advantages of going this route include:
- No federal income tax withholding penalty
- You can borrow against your retirement plan account
- Continued growth of your investments with a tax deferral
What are some of the downsides to this option? Your new employer’s investment options may not be what you’d like to invest in. Additionally, the plan may have restrictions attached to it.
2. Direct rollover of current fund into an IRA
If you’re not planning on getting a new job, then it’s a good idea to initiate a direct IRA rollover. This is when you transfer your retirement plan funds into a traditional IRA. Because this is a trustee-to-trustee transfer you avoid the tax penalty that’s associated with indirect rollovers. What’s more, you don’t have to pay the 20% mandatory federal income tax withholding nor the 10% early withdrawal penalty.
The pros of this option are:
- Diversified investment options – stocks, mutual funds, precious metals, real estate, CDs, bonds, annuities
- Ability to transfer funds to beneficiaries in the event of your death with your heirs being able to establish withdrawal plans from the account
- IRA waiver of the 10% penalty for those wishing to pursue higher education or purchase a first home (Note: The withdrawal will still be subject to income tax)
3. Cash-out of your qualified retirement plan
Regardless of which retirement plan you have – 401(k), 403(b), or 457, an alternative option of what to do is to cash out the plan. Yes, this means getting a check from your employer of the money in your qualified plan. This can be extremely tempting, however, before you go ahead and ask for the check you must know the following:
- 20% of the money will be withheld by your former employer to cover federal taxes meaning you’ll only get 80% of the money in your plan
- So long as you haven’t turned 60 years, you’ll be fined a 10% tax penalty for withdrawing early
- If you decide later in life that you’d like to work again you have to build another retirement savings plan from the ground up
In the event that you change your mind and don’t want to cash out anymore, you’ll be given 60 days to move all the money into an IRA via an indirect rollover. This transfer does not attract the 10% withdrawal tax penalty. But, if you fail to transfer all the money, whatever you take out will be taxed as ordinary income.
4. Leave the plan where it is
Leaving the plan where it is means you choose to keep the money in your former employer’s plan. This isn’t a problem for many businesses so long as you have a minimum of $5,000 in the said retirement plan. Why is this deemed the easier plan of them all?
- Firstly, because there are no hassles about losing money with transfers
- Secondly, you’ll be able to withdraw from the plan if the need arises
- Thirdly, once you reach 55 years you’re eligible to withdraw money from your plan sans penalty
The only downside with this option is not having control over the type of investments made. Your former employer may choose to change investments and because you no longer work there, you may not know until it’s too late.
Discuss further options with a financial advisor
Would you like to discuss more options with a certified financial advisor? Contact our expert team today.