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Rules of a Rollover

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Saving for retirement is one of the most important personal finance decisions most of us undertake.

Whether you are starting a new job or getting ready to retire, you’ll have to make a decision about what to do with your employer-sponsored retirement plan.

You Have Four Choices¹

  1. Leave the money in your former employer’s plan;
  2. Roll the money over to your new employer’s plan, if the plan accepts transfers;
  3. Roll the money over into an individual retirement account; or
  4. Take the cash value of your account

We’re going to explain each of your four possible choices in greater detail and highlight the pros and cons.  But it’s important to remember that your retirement plan plays only one role in your overall financial strategy. When we provide guidance on what decision to consider when preparing for retirement, we will review your entire financial situation.

Leave the money in your former employer’s plan²

Some employers will allow you to keep your money in their retirement plan after you change jobs or retire. Like all four choices, there are trade-offs with this decision.

As a general rule, if you have more than $5,000 invested, most plans will allow you to stay. But you will no longer be able to contribute to the plan. Some plans may also have restrictions on changing your investment choices. But if you are comfortable with the plan, leaving your money may be the best choice for you.

Roll the money over to your new employer’s plan, if the plan accepts transfers³

When you consider a new job, one factor to evaluate is whether the new company offers a retirement plan. If they do, you might want to ask whether they allow you to transfer the money from a previous plan. One benefit of this choice is that it may help consolidate your retirement accounts. If you opt for a direct transfer, from custodian to custodian, you may avoid any penalties.

Roll the money over into an individual retirement account (IRA)⁴

If you are changing jobs, this is one choice to consider. But, if you are retiring, rolling the money over into an IRA may make a bit more sense.

When you retire, you may no longer have any work responsibilities, so keeping your retirement money in a work-related account may just not be a good fit with your new lifestyle. Also, as you move into that next phase of your life, you may start to focus on your estate strategy and other legacy considerations. An IRA may provide you with more flexibility as you consider different estate approaches.

With an IRA, after reaching age 73, you must begin taking required minimum distributions from in most circumstances. Withdrawals are taxed as ordinary income. If a withdrawal is taken before age 59¹/², a 10% federal income tax penalty may apply.

Take the cash value of your account

Taking the cash is a choice, but that decision comes with some difficult trade-offs. Withdrawals are subject to a mandatory 20% federal withholding, and in some cases, states may also have mandatory withholding. Depending on your age, distributions may also be subject to a 10% early withdrawal penalty. That may be a setback for your retirement strategy.

But for some, it may be the correct choice if they have an immediate need for the money. However, any decision should consider the taxes and fees that must be paid.

It’s important to remember that this is a high-level discussion, and some key factors were overlooked for simplicity. For example, if you have an outstanding loan against your retirement plan, another level of analysis might be necessary.

  1. FINRA.org, 2023
  2. BankRate.com, February 3rd 2023
  3. Schwab.com, July 13th 2023
  4. Investopedia.com, May 23rd 2023

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