The Benefits of Preserving your Retirement Savings
For most people, it's probably true that changing jobs, and all that goes with the decision to leave one employer for another, is stressful enough. But like all major changes in life, there inevitably are issues to be considered, and decisions to be made.
For employees who have participated in a previous employer's 401(k) or other pension plan, one of the most important decisions is figuring out how to handle the money that you've accumulated. Most people will be confronted with up to four options:
Spending the money now;
Leaving it in your previous employer's plan;
Transferring it to your new employer's plan, or,
Rolling the money over into a rollover IRA.
IRA Options to Consider
Each option may have powerful implications that can affect your future financial security. But one choice that is almost always not in your best interest - especially if you are younger - is to spend it now.
Spending now means paying taxes now; taxes that may be significant. While it can seem like a quick fix when bills may be piling up, the Federal income tax and State income tax - not to mention Federal penalty tax - may eat up almost half of the money.
What's more, money lost to taxes today can't grow for tomorrow. The ultimate cost could be tens or even hundreds of thousands of dollars that might have been accumulated at retirement had the money not been spent.
Another possible option is to leave the money in your present employer's plan. But as a former employee you would not be able to add to it in terms of new contributions. You would be able to add contributions with a third option if it is available. Transferring the money to your new employer's plan would allow you to add more money over time. However, your investment options would be limited to only those offered in that plan.
A fourth choice is to rollover the money to an IRA. A rollover IRA allows you to both defer taxes and choose from literally thousands of investment options. This is where your financial advisor can be very valuable, by helping you assess which investment strategies and options make the most sense for you.
When assessing the option that's best for you, always consider the level of fees in each choice.
One thing that is sure to make sense for you - or anyone else, for that matter - is to have more money in retirement rather than less.
A rollover IRA may help you accomplish just that.
The distribution rules for a Rollover IRA are the same as the rules for a traditional IRA. Contributions and earnings are taxed when withdrawn after age 59 1/2. Withdrawals before the age 59 1/2 are taxable and subject to an early withdrawal penalty with certain exceptions. Withdrawals must begin by the year after you reach 70 1/2 to avoid penalties.
Your employer can directly rollover your retirement plan payout into a Rollover IRA and you will avoid the IRS withholding tax.
Before making any decisions about your pension distributions, be sure to contact us so that we can discuss the options that best fit your needs.