Louri Boilard - Manchester, NH -Changing Jobs (Part 3 of 3) Retirement Plan Options

Changing Jobs (Part 3 of 3) Retirement Plan Options
By: Paul McDonald, MBA

Maintain Stability in the Midst of Change

Life can bring a flood of changes during your working years. Career changes. Changes in priorities. Changes from work to retirement. How can you make sure that your investments will navigate through these periods of change?

Retirement Plan Options

One of the toughest challenges we face is building and maintaining a retirement account that will help us to meet our financial goals. The money you save for retirement has a certain amount of protection--when your financial situation changes, you can continue to protect your investment by "rolling over" your qualified retirement plan into an Individual Retirement Account (IRA). It is critically important to learn how you can guard your money against penalties, taxes, and other implications associated with income and employment changes.

The Four Basic Options: 1. Take it out for immediate use 2. Leave it in your current employer's retirement plan 3. Move it to your new employer's retirement plan 4. Roll it over.

Let's take a closer look at these four options.

Option 1: Take it out for immediate use. If you've participated in a retirement plan for a while, you may be surprised at the amount you've saved. You may be tempted to spend it to pay down a debt or make a signification purchase. There are serious consequences for your money:

Pros: * Money is immediately available

Cons: * Pay federal income tax and possibly state and local taxes * If you are under 59 ½, you must pay a 10% early withdrawal penalty if no exception is applicable * Endanger your retirement plan

For example, let's assume you're 35, changing jobs, and say you've saved $50,000--enough for that little purchase you've always wanted to make. If you withdraw the money now, you'll actually receive, after taxes: $50,000 Withdrawal - 5,000 Early withdrawal penalty - 14,000 28% federal income tax * -2,500 5% state tax * --------------------------- $28,500 After taxes and penalties

* Federal and state tax brackets are assumed and very from person to person, and state to state

In a flurry of sudden taxes and penalties, that dream purchase may revert from reality to dream once again.

Option 2: Leave it in your current employer's retirement plan. Your employer may offer you the option of leaving your money in its present retirement plan. For reasons of convenience, you may decide to leave it with that employer.

Pros: * Continue earning the same tax-deferred benefits * No administrative paperwork hassles * No change in portfolio

Cons: * You may forgo increased investment flexibility * Access to future withdrawals and cash distributions may be restricted * Control over your investment choices may be reduced * You may actually lose track of your funds

Option 3: Move it to your new employer's retirement plan. If you're moving to another job, your new employer may offer an alternative qualified retirement plan. You should review this new option and consider whether new features may enhance the value of your account.

Pros: * Tax-deferred accumulation will continue * Your new plan may offer more flexible loan and distribution options * You may be able to pool all of your retirement funds together.

Cons: * Assets from the old plan may not be transferable to the new plan * May experience restricted withdrawal and distribution options * Investment options may not be as attractive or broad * May have a less flexible fee structure

Option 4: Roll it over. An Individual Retirement Account (commonly known as an "IRA") is an option many individuals choose for their retirement plan assets. You can roll over your savings from a qualified retirement plan to an IRA, maintaining their tax-deferred status. with this option, there are even fewer potential drawbacks.

Pros: * Tax-deferred compounding continues * No current income tax consequences * Broad range of investment choices * Ability to consolidate your retirement assets * Roth IRA conversion may be possible

Cons: * No possibility of loans * No Employment Retirement Income Security Act (ERISA) creditor protection (but there may be protection under state laws)

Next Steps: Rolling Over your IRA

The Direct Rollover. In a direct rollover, your 401(k) assets are transferred directly by your plan sponsor to your new IRA custodian. You avoid paperwork, phone calls, unnecessary hassle and the mandatory 20% federal tax withholding you otherwise must pay when withdrawing money from a retirement plan.

Beware. Alternatively you can chose to complete an indirect rollover. It is more cumbersome and may result in the payment of taxes and penalties. In an indirect rollover, the distribution is paid to you and 20% is automatically withheld for income tax. Not only do you become responsible for paying the distribution to your Rollover IRA within 60 days, but you must provide cash from your own savings to cover the 20%$ withheld for taxes. If you don't roll over the distributions within 60 days, it becomes subject to income taxes; and if you're under 59 ½, you'll have to pay a 10% penalty tax on top of that if no exception to the penalty is applicable to you.

About the author:

Paul D. McDonald, MBA is a financial professional specializing in working with seniors and business owners. He assists people in making decisions on retirement planning, investing, insurance, budgeting, debt management, and many other critical financial decisions. Paul welcomes calls on the subject at the toll-free number 1-877-711-1264 or you can visit his website at http://boomerfinances.blogspot.com/.