Personal Finance

On the Move

In our mobile society, it’s nice to know that you can take the money you’ve saved in your employer’s retirement plan with you if you change jobs. Or, your plan may give you the option of leaving your money where it is. Before you make a move, however, think carefully about what would be your best move.

Roll It Over

One option you may have is to roll your plan money over to your new employer’s plan or an individual retirement account (IRA). If you choose the rollover option, consider arranging a “direct” rollover (trustee-to-trustee transfer) from your former employer’s plan to the new plan or IRA. With a direct rollover, there are no immediate tax consequences and your savings would have the opportunity to continue growing tax deferred.* 

Instead, you could make an “indirect” rollover. With an indirect rollover, you receive your money (minus 20% federal income-tax withholding) and have just 60 days to roll it over to an eligible plan or IRA. You’ll be taxed on any amount you don’t roll over by the deadline, and a 10% early withdrawal penalty could also apply. Note: You’ll have to replace the withheld funds and include that amount in your rollover or it will become taxable to you (and the 10% penalty may apply). 

Before making a rollover, be sure you understand the fees and expenses associated with the new account. 

Leave It Alone 

A second option may be to leave the money in your current plan. With this option, the money stays in your account, and you can continue to invest it on a tax-deferred basis. You won’t have to pay current taxes or any penalties. So, if you prefer the plan’s investment choices, leaving your money in the plan might be the right option for you. 

Also consider this option if you leave your employer between age 55 and 59½ and think you may want to take plan withdrawals before you turn 59½. A special tax rule may allow you to avoid the 10% penalty on those withdrawals. (You generally have to wait until age 59½ to take money from an IRA without penalty.) Consult your tax advisor for details about the penalty and when it applies. 

Cashing Out 

A third option is to take a payout from the plan and not roll it over. If you need a quick source of cash, this option may be tempting. However, you’ll experience a number of negative consequences: 

  • You won’t receive the full amount of the distribution. The plan is required to withhold 20% from the payout for federal income-tax purposes. (Your actual tax bill may be more or less than the withheld tax.) 
  • You may owe a 10% early withdrawal penalty in addition to income taxes. 
  • If you spend your savings, you won’t have them for retirement. Nor will you have any of the compounded investment earnings that money could potentially have earned during the rest of your working years. 

Bottom line: Cashing out could mean having less money for your retirement. 

* Distributions from a designated Roth account may be directly rolled over to a Roth IRA or a designated Roth account in another employer’s plan. 

If possible, make the choice to keep your retirement savings working for you in a tax-deferred account if you change jobs. 

Costs of Cashing Out 

If you cash out a $40,000 pretax plan account when you change jobs, paying income taxes and an early withdrawal penalty could leave you with a lot less than you anticipated. 

This is a hypothetical example used for illustrative purposes only. It assumes a combined federal and state income-tax rate of 25%. Your combined tax rate may be different, and the 10% penalty may not apply in your circumstances.

Source: DST

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

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