Distribution options when leaving a job

It’s important to consider the whole picture when you’re leaving your job and deciding what to do with your retirement plan assets. 

Option 1: Leave your assets in your current plan

If you like your current plan, and your plan allows it, you may want to leave your assets where they are. Consider whether you anticipate that the plan will meet your goals over the long term. When evaluating this option, you should ask yourself whether:

  • You’re content with your current plan
  • You like the investment options in the plan
  • The current level of flexibility and control suits your needs
  • You’re aware of plan costs

Option 2: Roll your assets into an IRA

If you have assets in more than one retirement account, a direct roll-in may allow you to consolidate your assets while maintaining tax-deferred growth. You can roll all of your retirement plan assets into one account, which may simplify managing your money. An IRA may have different fees, so check before you decide. When evaluating this option, you should ask yourself whether:

  • You want to save for retirement outside of your employer-sponsored retirement plan
  • You want more flexibility than your employer’s plan offers
  • You prefer having a single IRA
  • You want the ability to move roll-in assets to a future employer’s plan or to convert to a Roth IRA
  • You're aware of plan costs

Option 3: Move savings into a new plan

Compare your current and new plans and think about whether one better matches your retirement savings goals. Examine the investment options, fees, and provisions before making a decision. When evaluating this option, you should ask yourself whether:

  • You prefer the investments in the new plan
  • You like the idea of consolidating your savings
  • The plan’s provisions are acceptable for the assets you’re rolling in and for your new contributions
  • You’re aware of plan costs

Option 4: Take the cash

Taking a cash distribution may cost you now and later. Depending on your age, you may pay taxes and penalties that greatly reduce your savings, and you may lose the wealth-building power of compounding over time. Make sure you understand the pros and cons before deciding to cash out.

 

What happens to Jim’s $50,000 retirement plan savings if he cashes out?

Tax or penalty type

Description

Amount

Standard tax

The plan administrator automatically deducts 20%, as required by law. 
20% of $50,000 = $10,000

-$10,000

Early withdrawal penalty

Jim is under age 59½, the age when he can begin taking penalty-free withdrawals. He owes an additional 10% in penalties.
10% of $50,000 = $5,000

-$5,000

Tax bracket adjustment

Jim is in the 32% income tax bracket. Only 20% was deducted iunder the standard tax penalty. He has to make up the 12% difference.
12% of $50,000 = $6,000

-$6,000

State and local taxes

We deducted $2,500 for state and local taxes, based on a 5% average tax rate; this amount may be higher or lower, depending on where Jim lives.

-$2,500

Final distribution

Jim’s taxes and penalties add up to $23,500, which is subtracted from his savings total. His $50,000 distribution now totals only $26,500.

$26,500

Ask a financial professional for help understanding your options so you can make the decision that’s right for you.