Distribution options when leaving a job

When you’re leaving your job and deciding what to do with your retirement plan assets, take time to evaluate your retirement strategy so you can make an informed decision that aligns with your goals.

Option 1: Leave your assets in your current plan

If you like your current plan’s options, you may want to leave your assets where they are if your plan allows. If you choose this option, you can create a systematic withdrawal plan that provides income during retirement. You’re limited to the plan’s investments and provisions, so make sure you understand them before you decide.
   

earnings

American workers have been with their current employer an average of 4.2 years.1

1U.S. Bureau of Labor Statistics, Employee Tenure in 2016, September 22, 2016.

  
You may want to consider this option if you agree with these statements:

  • I’m content with the plan.
  • I like the investment options.
  • I enjoy my current flexibility and control.
  • I’m comfortable with the plan’s limitations and provisions.

Option 2: Roll your assets into an IRA

You can roll over any qualified retirement money into an Individual Retirement Account (IRA), including savings from any or all former employers’ retirement plans. A direct rollover allows you to consolidate your assets and still enjoy tax-deferred growth.

You may find that having all of your retirement plan assets in one account may simplify managing your money. However, this type of plan may have different fees, so make sure you understand your options before you decide. You may want to consider this option if you agree with these statements:

  • I want to save for retirement outside of my employer-sponsored retirement plan.
  • I want more flexibility than my employer’s plan offers.
  • I prefer the simplicity of a single IRA.
  • I want the ability to move rollover assets into a Roth IRA.

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. You may want to consider this option if you agree with these statements:

  • I prefer the investments in the new plan.
  • I like the idea of consolidating my savings.
  • It’s easier to manage one account.
  • I accept the plan’s provisions for all of my assets — what I’m rolling over and new contributions.

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 could greatly reduce your savings, and you may lose the wealth-building power of compounding over time. Make sure you understand the consequences before deciding to cash out.

potential effects of taxes and penalties

As an example to illustrate the impact of withdrawing cash from a retirement plan, consider Jim, age 55, who has $50,000 in his employer’s retirement plan when he leaves the company to take a job at another firm. View the chart below to understand the financial impact if Jim were to cash out early.

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 will automatically deduct 20%, as required by law (20% of $50,000 = $10,000).

-$10,000

Early withdrawal penalty

Jim is under age 59 ½, 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

Jim is in the 31% income tax bracket. Only 20% was deducted under the standard tax penalty. He has to make up the 11% difference (11% of $50,000 = $5,500).

-$5,500

State and local taxes

We’ve used an average of $2,500 based on 5% tax rate; this could be higher or lower depending on where Jim lives.

-$2,500

Final distribution

Jim’s taxes and penalties add up to $23,000, which is subtracted from his savings total. His $50,000 distribution now totals only $27,000.

$27,000

Workplace retirement plans vs IRAs

If you’re trying to decide between a workplace plan or rolling your assets into an IRA, here’s a quick comparison that may help.

Workplace retirement plans

IRAs

Potentially greater oversight. Fiduciaries of employer-sponsored plans are responsible for choosing an investment lineup that’s in the best interests of their employees.

Potentially more investment choices. You may pay potentially higher fees in exchange for more investment options, but most IRAs have a wider variety of choices than workplace plans.

Potentially lower fees. Thanks to institutional pricing, investment fees and other expenses in employer-sponsored plans may be lower than those in IRAs.

Independence. IRAs allow some of your retirement savings to be independent of your employer. You can invest in an IRA through financial services groups or through a bank.

Access to loans. Workplace retirement plans often allow you to take loans from your savings. Keep in mind that taking a loan from your retirement account can hinder your progress toward your goals.

Potential access to your money. The IRS permits IRA account owners to withdraw their funds penalty-free under certain circumstances. Standard income taxes still apply to these types of withdrawals.

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