If you decide to leave your job, you'll have many issues to consider and some
financial decisions to make. One of the most important questions you'll need to
ask yourself is this: What should you do with your 401(k) or other
employer-sponsored retirement plan?
Fortunately, you have several options, including the following:
- Taking the money in a lump sum - If you have lost your job, you may be under
financial stress. This may tempt you to cash out your retirement plan and take
the money as a lump sum. And if your plan is your only source of savings, you
may not have much choice. But if you have any other financial resources to draw
on, you might want to avoid taking the lump sum. If you liquidate your plan,
you'll no longer benefit from tax-deferred earnings growth. Furthermore, your
employer must withhold 20 percent from your distribution - and if you're under
59 1/2, your distribution may be subject to a 10 percent penalty.
- Leaving the money in your plan - You might be able to leave your money in your
former employer's retirement plan, if the plan permits. This could be a good
option if you are pleased with the investment choices available in the plan.
But if you're not, you may want to consider other possibilities.
- Moving the money into a new plan - You may be able to move the money from your
old plan into a new employer's plan, if the new plan allows such transfers.
This move might make sense if your new plan offers attractive investment
options.
- Rolling over retirement assets into an IRA - Depending on your individual
situation, this "rollover" option could be your best choice. By making this
rollover, you'll avoid the 20 percent withholding and current income taxes on
your retirement plan distribution. Plus, you'll keep your retirement savings
growing on a tax-deferred basis. And you'll have an almost unlimited array of
investment choices. Within your IRA, you can even build a diversified portfolio
to reflect your risk tolerance, time horizon and long-term goals. Finally, once
you move your retirement account into an IRA, you can later convert to a Roth
IRA, so you can eventually make tax-free withdrawals, provided you meet certain
conditions. (Keep in mind, though, that when converting a traditional IRA to a
Roth IRA, you will generate a tax liability.)
Review your choices carefully.
Review your retirement plan distribution options carefully with your tax or
investment professional. You may be making one of the most important financial
decisions of your life - so make it a good one.
