SEE ALSO >>> Estate & Trust Services
You’ve landed a new job. Congratulations! As you plan your transition, you’ll need to decide how to handle any money you’ve accumulated in your current employer’s retirement plan. One option is simply to withdraw the funds. But withdrawal can cost you in several ways. For one thing, the money no longer will grow tax-deferred, helping you build a retirement nest egg. What’s more, you likely will have to pay taxes on the distribution and may also owe an early withdrawal penalty.
Some strategies
To avoid unfavorable tax consequences and penalties, you can choose from several options that will allow your money to continue to grow:
Leave the funds in your former employer’s plan. If you have at least $5,000 in your account, you typically can keep the money in the plan. Note that, if you have between $1,000 and $5,000 in your account and don’t elect to receive the money or roll it over to another account, the plan administrator may deposit your money in an IRA. If your balance is less than $1,000, the administrator may pay it to you — typically, after withholding 20% for income taxes. You can still roll over these funds.
The advantage of keeping your current plan is that you don’t have to make any changes or decisions. But the disadvantages can outweigh this benefit. For instance, you’ll need to continue tracking this account, in addition to any other retirement accounts, such as one with your new employer. And it won’t make sense to remain in a plan if it has limited investment choices or high fees.
Move your money to your new employer’s retirement plan. If your new employer offers a retirement plan and accepts rollover contributions — that is, contributions from another plan — you may want to move your funds there. This reduces the number of accounts you’ll need to track over the long term. It’s also possible the investment options in the new plan will better fit your needs than your previous plan did. You’ll want to review the investment choices and fees.
Roll the funds to an IRA. If you have or open an IRA, you can move the funds there. IRAs often offer more investment options, at a lower cost, than many employer-sponsored retirement plans. It’s important to be aware that IRAs have some restrictions that employer-sponsored plans, such as 401(k) plans, don’t. For instance, you can’t take a loan from an IRA.
Rollover rules
Assuming you move your funds to an employer-sponsored retirement account or an IRA, you’ll want to follow the rules that govern rollovers. A mistake could cause you to owe taxes or a penalty. If you decide to roll over the account, here are two options:
1. A direct rollover (sometimes called a trustee-to-trustee transfer). You can ask your former employer’s plan administrator to directly move the money in your retirement account to another retirement account. He or she may issue a check payable to the new account, without withholding any money for taxes.
2. A 60-day rollover. Your former employer’s plan pays out the plan balance to you. To avoid owing taxes on that balance, you’ll need to deposit it in a retirement account or IRA within 60 days. (In some cases, the IRS will waive the 60-day rollover requirement.) But your distribution will be subject to 20% withholding, even if you plan to roll over the funds — and you can only do one of these in a rolling 12-month period.
If you want to roll over the entire retirement plan balance, you’ll need to find another source of money to make up for the amount withheld. If you don’t, you’ll owe taxes and possibly a penalty on the amount withheld, because it will be considered a distribution.
Consult a professional
Stay on top of your employer-sponsored retirement accounts to ensure you don’t pay a price for changing jobs. Your accounting professional can provide additional information on the pros and cons of various rollover options, as well as the regulations that govern them.