After leaving a job in Miami, Charleston, Charlotte or Atlanta, workers generally have three options when it comes to the money they have saved in their former employer’s retirement plans. They can keep the money in the plan, roll the money directly to an individual retirement account, or cash out and take a lump-sum distribution.
The way in which you handle your retirement plan assets when leaving a company is an important decision that could affect your retirement savings considerably. One of these choices may result in current taxes and penalties. One may end up limiting flexibility and your investment options. Rolling your money directly to an IRA may enable you to avoid the hassle and cost of the other two options while you continue saving for retirement.


Cashing Out
Taking a lump-sum distribution not only subjects the withdrawal to income taxes plus a 10% federal income tax penalty for someone younger than 59½ (with certain exceptions), but companies will withhold 20% for taxes. Despite these disincentives, 46% of workers who left their jobs in 2008 decided to cash out and pay the taxes and penalties.1

Staying Put
Although leaving money in your former employer’s plan may avoid current taxes and penalties, it may not be the ideal saving situation for you. Not all plans allow former employees to remain, so you might get the boot. If your plan allows your funds to stay, you may be subject to certain restrictions and will continue to be limited by the investment options offered by that plan.

Rolling Over
By transferring funds directly to a traditional IRA by the way of a Roll Over , you can preserve tax deferral and avoid penalties. Beyond that, IRAs offer benefits that aren’t available with many employer-sponsored plans.

IRAs tend to have more flexible rules than workplace plans. This can affect everything from customizing your investment selections to naming your beneficiaries. IRAs generally have fewer restrictions when it comes to inherited plans, which could make it easier for your heirs to stretch the account into possibly decades of tax-deferred growth potential. Finally, the range of investment options with an IRA vastly outnumbers that of most employer-sponsored plans.

Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. Distributions taken prior to age 59½ may be subject to a 10% federal income tax penalty, except in cases of the owner’s death, disability, or a qualified first-time home purchase ($10,000 lifetime maximum).

1) Hewitt Associates, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.



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