If you’re changing jobs, you may be wondering about what to do with your accrued retirement plan savings. Obviously you’d like to maximize your retirement savings and minimize the taxes you pay on them, but it isn’t always clear how best to do that for your own personal situation. Whenever you change employers, you generally have four retirement plan distribution options, and each option has factors to consider in terms of investment choices, expenses, services offered and more. Last time we spoke about two of them: rolling over your money into an IRA and keeping your savings in your former employer’s plan, if allowed. This time we’ll focus on the other two options: transferring your assets into your new employer’s plan and taking a lump-sum distribution.
Transferring Assets to New Employer’s Plan
Some of the main benefits of transferring your assets into your new employer’s plan include:
Tax-deferred growth potential
Fees and expenses may be lower in an employer-sponsored retirement plan than an IRA
Avoidance of 10% IRS tax penalty on plan distributions if you retire at age 55 or older (50 or older for certain public safety workers)
May allow RMDs to be delayed until you retire and may provide additional protection against creditors
Retirement assets from former and new employer can be combined into one plan
Loans may be allowed
However, you should also consider that:
Eligibility is determined by new employer and may have a waiting period before allowing enrollment
New plan may restrict the type of rollover assets allowed and/or investment options
Complicated paperwork may be required for moving assets
Net unrealized appreciation (NUA) is the difference between what you paid for employer securities and their increased value. You lose favorable tax treatment of NUA when assets are moved to a new plan.
Taking a Lump-Sum Distribution
The primary benefits of leaving your assets in your former employer’s plan include:
Immediate access to your retirement savings, which can be spent however you wish
Avoidance of 10% IRS tax penalty on plan distributions if you retire at age 55 or older (50 or older for certain public safety workers)
May qualify for favorable tax treatment of NUA, if applicable
However, you should also consider that:
Funds lose tax-deferred growth potential
Distribution may be subject to taxes (federal, state, and local) unless rolled into an IRA or employer plan within 60 days
May owe 10% IRS tax penalty on plan distributions if you leave your employer before age 55 or older (50 or older for certain public safety workers)
Former employer is required to withhold 20% for the IRS
When you change jobs, it’s important to think about what you’ll do with your retirement plan savings.