Rolling Over Your IRA
Rolling over to an IRA doesn’t have to make your head spin. If you’ve lost your job, or are changing jobs, you may be wondering what to do with your retirement account. To help you make the best decision for you, we have provided a summary of advantages and disadvantages for each option to help you think about questions to ask before deciding what you should do.
Available Options
There are generally four options available to retirement plan participants when they terminate employment. The first three assure that your money remains tax-deferred. The fourth option will subject your money to current taxes and a potential tax penalty.
Generally, if your vested retirement account balance is $5,000 or more, you may leave your money in your former employer’s plan until you reach your retirement age. Please note, this option is not applicable in the case of a plan termination.
If you would like to preserve the tax-qualified status of your retirement account, you may choose to rollover your retirement plan account to an Individual Retirement Account (IRA). To be sure you open the proper type of IRA, make sure you open a “Rollover IRA.” While Rollover IRAs are offered through banks, insurance companies, mutual fund companies and brokerage firms, they are technically all the same type of account. What is different is the type of investment programs made available to accountholders. It is important to find out what types of investments are available to you before choosing a financial institution to open your Rollover IRA.
Another way to preserve the tax-qualified status of your retirement account is to roll the balance to your new employer’s retirement plan. While most employer plans allow new employees to roll their accounts in, it’s important that you ask first to be sure.
It’s your money and you get to choose what’s right for you. One decision you could make is to simply withdraw the money and use for daily expenses that you have now. Please note that you’ll owe Federal (and potentially State) income taxes on the money that you withdraw. The government requires your plan’s service provider to withhold 20% for Federal taxes. This may not be enough since a large withdrawal may actually push you into a higher tax bracket in the year you take the distribution. In addition to Federal and potential State income taxes, if you’re under age 591/2, you would also be subject to a 10% early distribution tax penalty unless some other exception applies.
*If you have a loan balance after termination, please know the terms of your loan end the day you leave the company.
