Rollover
You're Doing Great… So Far
People trying to amass a nest egg for retirement usually have very definite ideas about the way they want to do so, whether it be with through a retirement account such as a 401(k) or some type of IRA, straight mutual fund investments, stocks, life insurance products, old-fashioned savings, or some combination thereof. But most people don't spend much time thinking about what to do with the assets they've managed to accrue. To the majority of Americans working toward retirement, the main thing that matters is the number on the bottom line signifying how much they've accumulated to use in their retirement.
This is a common oversight, but a savvy investor knows that choosing the appropriate retirement distribution method can have a significant effect on the amount of money he or she gets out of his or her retirement funds.
Distribution decisions don't just come into play at the brink of retirement, either. If you have an employer-sponsored retirement account such as a 401(k), 403(b), DROP, governmental 457, SIMPLE-IRA, or SEP-IRA, you have a distribution decision to make every time you switch jobs.
In general, you have four options:
- Take a lump-sum distribution in cash. This can be a tempting option. After all, you'll be able to see a nice, sizeable amount of cash in your bank account, all ready for you to spend on whatever you want. But taking this option can lead to significant tax penalties, especially if you are not yet 59½ years old. Between automatic federal withholding, early withdrawal penalties, and potential state and local income taxes, you might lose as much as 45% of your money and spending power. As well, taking a lump sum distribution means that you lose any power of tax-deferred growth that your funds might have enjoyed.
- Leave the funds where they are. With some employers, a possible option might be to leave your money in your present retirement account even after you leave your job. While this will help you avoid the potential tax penalties that might come with a lump-sum withdrawal and allows your money to keep growing on a tax-deferred basis, it comes with a different set of possible disadvantages. Some plans will prohibit access to your money until you reach retirement age, meaning that the fund will not be available for emergency distributions or loans. If you repeat this tactic as you move from job to job, you will also find managing your investments to be more complicated, with increased amounts of paperwork. Of course, this tactic also opens up the need for potentially awkward communications with your former employer(s).
- Transfer the funds into a new employer's plan. A third option is to transfer your funds into a retirement account sponsored by your new employer. Like the previous choice, rolling over your funds in this fashion will help you preserve the tax-deferred growth component of your money. And there is less possibility for tax withholding or penalties. But you might not be eligible to participate in your employer's retirement account right away, and this delay can lead to lost growth opportunities. As well, you still might face restrictions on access to your own money — even your transferred funds.
- Roll the funds over into an IRA. This fourth option offers you greater control over your retirement funds, greater flexibility and choice, and ease of management. By rolling your funds over into an IRA, you can avoid immediate tax withholding and early-withdrawal penalties; at the same time, your funds continue to enjoy opportunities for tax-deferred growth. Rolling your money into an IRA also gives you a far greater choice in investments than any employer-sponsored retirement account can offer, and because you are consolidating your assets, it becomes easier to keep track of how your nest egg is doing.
Deciding which option is best for you can be a complicated process; each offers a complex array of possible advantages and potential ramifications. First Investors can be valuable asset as you make this important decision, and a First Investors registered representative can give you a personalized evaluation of your situation at no cost or obligation.
