Your Options
Choices When Leaving Your Job
So here you are, leaving your job and you've got a million things to think about. Near the top of the list should be "What should I do with the money in my company retirement plan?". While a "recovery" week in Tahiti is tempting, we recommend you give yourself a few minutes to consider your options:
Option 1 - Leave your money in your previous employer's plan
Pros
- You won't have to pay taxes until you start taking money out of the plan when you retire.
- Your savings can continue to grow on a tax-deferred basis.
Cons
- There is typically less variety in your investment options. (Plan sponsors usually offer several proprietary funds and/or company stock.)
- You may have less control of your assets, depending upon the plan rules.
- You can't consolidate with other IRA accounts.
- You're typically restricted from borrowing money from your plan.
- Your employer could cash you out.
Option 2 - Roll over your money to your new employer's retirement plan
Pros
- You won't have to pay taxes until you start taking money out of the plan when you retire.
- Your savings can continue to grow tax deferred.
- You may be able to borrow money from your plan.
Cons
- You often have less variety and control over investments.
- Your investment options are limited to the choices within your new employers plan.
- Investment allocations you designated under your former plan will be liquidated.
- Many employers impose a wait period before a new employee may join the company retirement plan.
- Your investment dollars are out of the market for however long it takes to roll over to the new plan.
Option 3 - Take cash
Pros
- The cash can be used immediately for purchases.
- Money can easily be reallocated to diversify investments.
Cons
- You must pay income taxes - 20% will be immediately withheld for federal taxes.
- You must pay 10% federal penalty if you are under the age of 59½.
- Your money is no longer earmarked for retirement or earning interest.
Option 4 - Roll over to IRA
Pros
- You won't have to pay taxes until you start taking money out of the plan when you retire.
- You can reallocate and diversify your investment according to your needs and investment preferences.
- You can combine with other retirement money.
- Your money can keep growing, tax-deferred.
Cons
- You can't stay invested in previous funds and stock.
- You cannot borrow from your IRA account.
