Changing jobs is an important decision -- one that 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. Generally, you have four options for handling the money in your account:
Option #1: Keep the Money in Your Former Employer's Plan
If your former employer permits, leaving your money where it is an option. It will continue to allow tax-deferred compounding and you will still have access to the plan's investment options. On the downside, there may be special conditions or fees associated with your continued participation, and you may have withdrawal restrictions in the future. Lastly, you might want more freedom to choose investments options and guidance that are available outside of that employer plan.
Option #2: Roll the Money into Your New Employer's Plan
This option also allows 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, it is important to review your new employer's plan and possible eligibility restrictions carefully before choosing this option. You also want to make sure you’ve reviewed and like the investment options and guidance available in your new employer’s plan.
Option #3: 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 are under the 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.
Option #4: 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. Make sure that the financial professional you are working with to complete your rollover helps you understand what you are getting in return for any possible fees.
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.
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