Changing Jobs or Retiring? Rollover IRAs and Other Options

How do you make the right choice for your retirement plan? Let us assist you...each year, people who change jobs or retire wrestle with their options regarding their retirement account that they have accumulated with their employer-sponsored programs. Many are inclined not to make a decision in fear of making the wrong choice and simply leave the money in their former employer's plan.

There are generally four alternatives for your retirement assets in your former employer's retirement plan.

1. Roll them into an IRA
2. Take a cash distribution
3. Leave the assets in the plan (if your former employer allows for this)
4. Move the assets to your new employer's plan

Rolling Assets Into an IRA:

You can benefit by rolling money from your previous employer's retirement plans into what is often called a rollover IRA. An IRA rollover is an effective way to keep your money accumulating tax deferred. Using a rollover IRA , you transfer your retirement savings to an account here at Stifel and you can choose how you will invest the funds. To preserve the tax-deferred status of retirement savings, the funds must be deposited into the rollover IRA within 60 days of withdrawal from an employer's plan. To avoid penalties and a 20% federal income tax withholding from your former employer, you should arrange for a direct, institution to institution transfer. A rollover IRA can be tailored to your particular needs and goals, and here at Stifel, we can incorporate a variety of investment vehicles, as opposed to the limited number of options available in many employer-sponsored retirement plans.

Cashing Out:

While the idea of taking a lump-sum distribution when you change jobs or retire may sound attractive at first, you should carefully consider all of the financial consequences before you make your decision. Many people who decide to do something with their retirement plan assets, cash out and then pay unnecessary income taxes. Retirement income typically comes from three sources: Social Security, employer-sponsored plans/IRAs, and personal savings. Each time you tap into these assets when you change jobs will erode your savings and jeopardize your financial security for retirement. A withdrawal prior to age 59 1/2 can be taxed and incur a 10% penalty for early withdrawal.

Leaving Assets in Your Former Employer's Plan:

Average workers can expect to change jobs many times during the 40-plus years of working. Many, but not all, employers will allow you to keep your account within their plan, while others will require that you transfer out within 30-60 days. If you were to leave your account at each employer over your 40 plus years, it would create complexities in managing your investments as well as keeping track of where they are and informing them of any address changes for you.  As stated above, many employer-sponsored retirement plans have limited options available for investment choices. This may not provide the flexibility that you need, and if your assets are not properly allocated to reflect your personal time horizon and risk tolerance, your savings may suffer too much volatility or not provide the returns needed to achieve your retirement income. Depending on the plan's loan policy statement, you may be able to stay in the plan to pay off the loan. If you decide to take the distribution while having a loan, or cash out when you have a loan or your previous employer requires you to transfer out, the amount of the loan, if not paid back immediately, will be considered a distribution and subject to income tax and a penalty for those under 59 1/2.

Moving Assets Into a New Employer's Plan:

When changing jobs, you may be able to move your retirement plan savings into your new employer's plan. Doing so provides many of the same benefits as well as drawbacks of leaving the money in your former employer's retirement plan. Make sure your new employer permits transfers or rollovers from other types of plans before you start the process. Your new employer's plan will determine the investment and distribution options for the money you rolled into the plan. The investment options available in the new plan may not allow you to properly allocate your funds in order to allow you to meet your retirement goals. If this is the case, or your new employer does not offer a retirement plan or allow for rollovers, you can transfer your retirement plan into a rollover IRA. This alternative allows your money to continue to grow tax-deferred while saving through annual IRA contributions, and opens up other investment opportunities.

Contact us to learn more about rollover IRAs and to review your options. We can assist you in determining the best choice for you and your retirement goals.

You should also consult with your tax advisor regarding your particular situation. 

Decisions to roll over or transfer retirement plan or IRA assets should be made with careful consideration of the advantages and disadvantages, including investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and your unique financial needs and retirement planning.  Stifel does not offer tax advice.  You should consult with your tax advisor regarding your particular situation as it pertains to tax matters.