4 Options for Managing Your Retirement Plan When Changing Jobs

Changing jobs is an important decision, and 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.

To keep building tax-deferred savings, it is important to make yourself fully aware of your options so you can make an informed decision about your old plan. It can seem like a daunting problem to face, especially when combined with all the other complexities a job change can entail, but rest assured it doesn’t have to be.

Generally, you have four simple 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 may be an attractive option because it allows you to continue enjoying the benefits of tax-deferred compounding. If you are 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.

Option #2. 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 of your retirement assets in one place. But because every employer has its own rules governing rollover money, before you choose this option, review your new employer's plan and possible eligibility restrictions carefully.

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 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 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 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.

If you would like to discuss this topic in more detail, I invite you to get in touch.