The Washington Post
With layoffs, early retirements and buyouts again a feature on the U.S. employment scene, thousands of workers are suddenly confronted with a complicated but important question: What should I do with my 401(k) or other retirement savings plan when I leave my job?
Essentially, there are three choices:
Each alternative has an array of consequences, and figuring which is best isn’t easy because workers and their families all have their own unique circumstances.
Most experts advise keeping the money in a retirement plan of some kind – either a company plan or an IRA – if you can, especially if you are far from retirement age. They say this because the money involved is meant for retirement, to pay expenses when you are too old to work, and if you spend it now you may be buying yourself problems in the future.
“The whole idea of tapping that money before age 59 1/2goes against what the plan was set up for. If you have short-term needs, that’s one thing, but you shouldn’t be tapping it” if you don’t absolutely have to, said Ed Slott, a Rockville Centre, N.Y., certified public accountant.
If keeping the money is feasible, the choice for most people is between leaving it in their former employer’s plan and rolling it over into an IRA.
“Leaving it in the (former employer’s) plan is very cost-effective,” said Rob Reiskytl, a retirement and financial management consultant with Hewitt Associates, a big benefits-consulting firm.
Generally, fees are lower and you don’t have to pay for trades if you switch among the plan’s offerings.
Your employer is typically required to allow you to remain in the retirement account once you leave the company, as long as your balance is $5,000 or more.
In addition, if you expect to get another job, you can roll the balance from your old employer’s plan into the new one’s, assuming there is one. Reiskytl noted that restrictions have been eased, so that you can roll your balance into another plan that may not be a 401(k) plan, but something else such as a 403(b) plan (for teachers or employees of nonprofits) or 457 plan (for state and local government employees).
Employers don’t necessarily have to “allow these monies to roll in, but many are giving very serious consideration to allowing it,” Reiskytl said. “That is good news for the typical employee. It used to be very difficult if not impossible” to transfer a balance to a different kind of employer-sponsored plan,” he said.
He also said that if you were at least 55 in the year you left your former employer and you need to tap your money immediately, “distributions from your company plan will be subject to tax, but no 10 percent penalty. If you roll to an IRA, withdrawals before age 59 1/2 will be subject to the 10 percent early-withdrawal penalty” unless you qualify for an exception.
All this assumes, of course, that you are happy with the investment options offered by your former employer’s plan and are comfortable with the plan generally. Many people are, but if you aren’t, or if you want to manage your money more aggressively, then an IRA makes sense.
In addition to control, IRAs offer several other benefits, Slott said.
First, with proper planning an IRA can allow beneficiaries to extend the time the money remains tax-deferred. For example, a nonspouse beneficiary “can stretch distributions on an inherited IRA over his or her life expectancy,” Slott said, postponing taxes and allowing additional growth in the account.
Second, an IRA is more easily coordinated with an estate plan, Slott said, giving heirs valuable flexibility as to who gets what and when.
There are other benefits that may appeal to people in certain circumstances, such as the ability to convert to a Roth IRA with tax-free withdrawals in retirement.
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