Leaving Your Job? Be Smart About Your Retirement Assets

It’s fairly common for someone who’s leaving a company to take a cash distribution of their retirement account assets. But tapping into money that you’ve earmarked for retirement may not be the best decision. Before moving on, carefully consider the options for handling your hard-earned retirement assets — it may be one of the most important financial decisions you’ll make.

Take the money. Cashing out may not seem like a bad idea, especially if you aren’t going back to work right away. But your cash distribution will immediately shrink by 20% — your employer is required to withhold that amount. It’s essentially a down payment on the federal income taxes you’ll owe on the distribution. When tax time comes, you may owe even more than 20%, depending on your tax bracket. In addition, you may face a 10% penalty if you’re younger than age 59 1/2. And you’ll lose the potential benefit of tax-deferred appreciation.

Sit tight. Another option is to leave the money in your former employer’s plan (if allowed to do so). You may still benefit from tax deferral, but you won’t be able to make new contributions and you’ll have to choose from the limited selection of investments within the plan.

Move on. You may be allowed to transfer the assets to your new employer’s retirement plan. You’ll avoid penalties and continue to defer taxes until withdrawal, but you’ll still have limited investment options. And keep in mind that not all plans accept such transfers.

Roll over. Many people choose another option: Retirement plan assets can be “rolled over” directly to an IRA. Using a rollover IRA allows you to invest in almost any security. This flexibility can help you achieve your desired asset allocation and level of diversification over the course of your lifetime as your objectives change. And, because you never touch the money when rolling it over, you avoid penalties and continue to defer taxes until withdrawal — possibly at a time when you’re retired and may be in a lower tax bracket.1

Meeting the Need for Cash
It can be attractive to cash out your retirement assets if you’re carrying a heavy debt load or you’re facing some time out of work. But could you instead tap liquid assets, such as savings accounts and money market accounts that are often used for short-term needs? Consider all of your options before using assets intended for your long-term needs.

To learn more about managing retirement plan assets and the choices you’ll need to make, consult a qualified financial professional. If you decide a rollover IRA is right for you, he or she can help you initiate the process and keep your retirement assets working for your future.

1Withdrawals prior to age 59 may be subject to a 10% penalty tax.

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