For Mark Roberts’ Use: If you are (or were) and employee for someone, chances are good that you’ve utilized the company’s sponsored retirement account. You’re already ahead of the curve because you have considered your retirement income needs and you’re working toward a secure future.
However, what happens to that account if you decide to change jobs? At some point, you might be forced to seek new employment, or you might choose to move on to greener pastures elsewhere. Generally speaking, the rules of 401(k) accounts offer you four options:
- Leave the money in your former employer’s retirement plan (if allowed)
- Roll the money into your new employer’s retirement plan, assuming the employer offers such a plan and they allows rollovers
- Roll the money into an Independent Retirement Account (IRA)
- Take a cash payout from the account and invest the money on your own
There are benefits and drawbacks to each of these options. The first three allow you to preserve the tax-advantaged status that you’ve been enjoying with your retirement fund, and you will be able to continue tax-deferred growth of these assets.
Taking a cash payout from your former employer’s retirement fund can cause problems for you, however. If you use the funds for a non-tax-advantaged purpose, you might owe a 10 percent early withdrawal penalty. The money will also be taxed as income, and if the distributions bumps you up a tax bracket for the year, you could be facing a significant tax bill. Obviously, the biggest problem with taking a cash payout from your old retirement fund is that you’ll have to start over with your retirement savings! You will probably never be able to make up for that lost time.
Case in point: Let’s pretend Jim, who is thirty years old, decides to change jobs. He takes a cash distribution of his retirement fund, which amounts to $16,000 at this point. He thinks he has plenty of time to save that money once again, but Jim can’t age in reverse! He has lost years of compounding interest, and when he retires at age 67 this one mistake has cost him 500 dollars per month of retirement income.
Whether you need to change jobs or you choose to pursue a new career, you will face a decision about your former employer’s sponsored retirement account. Before making a decision that will affect your life savings, call us for an appointment and we can guide you through your options.