One important consideration when making a job change is what to do with the money you have saved in your former employer’s retirement plan.  There are four options available: 

1. Take Money Out of the Plan.  This is probably going to be the worst possible option.  Not only will you have to pay ordinary income taxes on the entire amount of the distribution, but also an additional 10% penalty if taken out prior to age 59½.
2. Leave Your Savings in your Former Employer’s Plan.  Although preferable to taking a distribution, this is generally not the best choice.  If you no longer want to work there then why force your money to stay?  This would be a good option only if the employer’s plan is truly exceptional, with a wide variety of investment choices and simple and inexpensive administration of the plan.
3. Move Your Savings to your New Employer’s Plan.  If your new employer’s plan will accept a rollover into the plan, then this is another option available.  Similar to leaving it in your old plan, you want to be sure that you are moving it to a truly exceptional plan.  This option will allow you to keep everything in one place once you are able to participate in the new plan but may not be the best choice.
4. Rollover to a Traditional IRA.  An IRA rollover is an effective way to keep your money accumulating tax deferred and provides several advantages when compared to the other options, the greatest advantages being choice and flexibility.

By utilizing an IRA Rollover, you can transfer your retirement savings to an account at a private institution of your choice and you will be able to choose how to invest the funds.  There are two ways to effect an IRA Rollover:  you can either do what’s called a direct rollover (the preferred method) or you can rollover the balance after taking a distribution from your former employer’s plan.  The direct rollover is preferred because it will allow you to avoid potential penalties and a 20% automatic tax withholding from your former employer’s plan.  Also, with the other method you only have 60 days to have the funds deposited into the IRA once the distribution is made and you have to make up for the 20% withholding and 10% penalty from your personal funds.

Most employer-sponsored plans have a limited number of investment options available, whereas an IRA can be custom-tailored to your particular needs and goals.  Also, if you have multiple accounts sitting with former employers, they can all be consolidated into one IRA for easier management and better control of your assets.

Earnings in a traditional IRA will grow tax deferred until distributions are made.  Distributions from a traditional IRA are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if taken prior to age 59½.  Just as with employer-sponsored retirement plans, you must begin taking required minimum distributions from a traditional IRA each year after you turn age 70½.

For early retirees, there is a provision under IRS 72(t) where you may be able to take substantially equal distributions to assist with retirement income needs.  There are several methods for calculation.  The rules state that you must use what ever method for five years or 59 ½ whichever is longer.  Your financial advisor can help with this calculation.

Copyright 2007, Jeff McClenning, www.keeninsight.com

Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA), member NASD, SIPC which is otherwise unaffiliated with Reliance Capital Advisors, Inc. and The Keen Insight Group™.

Used with permission