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Understanding Your Retirement Savings Rollover Options

Retirement Savings

If you’ve recently changed jobs, you may be wondering what to do with your retirement savings from your previous employer. Believe it or not, you actually have many choices, each with its own pros and cons. Below, find the four most common options and the pluses and minuses of each, from our friends at Service Financial Group.

Leave It Where It Is

Pros: If you choose to leave your previous retirement plan with your old plan administrator, you will not incur any taxes or IRS withdrawal penalties (IRS “Rule of 55”), and any tax-deferred compounding would continue. You may also continue to access special investment options, such as company stock.

Cons: Keeping track of your retirement plan can definitely be more challenging once you’re no longer working at the organization administering it. Since your access is controlled by the plan, you may not be allowed to continue contributing or take loans from the plan.

Move It to Your New Plan

Pros: If you have the option of rolling over your old plan to your new employer’s plan, this will help you consolidate and keep your retirement assets in fewer places. Transferring your savings to a new employer’s plan allows your assets to continue compounding, tax-deferred. You may also receive special access to investment options such as employer stock purchase programs, or provisions for taking loans. If you choose a direct rollover, you avoid current income taxes and the 20% mandatory withholding. 

Cons: Your new employer’s plan may limit your investment choices. The same goes for withdrawals, exchanges among investments, and emergency access to your money: everything is subject to the rules of the new plan. And distribution options before 59-1/2 could come with a 10% penalty.

And that’s all if you have access to a new plan. If you’re part-time or working independently, you may not have a new plan to consider.

Convert It to Cash

Pros: Cashing out your plan would give you immediate, unrestricted access to your money.

Cons: This is a case in which the pros likely outweigh the cons. Cashing out your plan before retirement may lead to hefty penalties and taxes, and throw your retirement plans off course. Twenty percent of the distribution is required to be withheld to pay taxes; your distribution is subject to federal and state income tax at current rates.

Roll It Over to an IRA

Pros: A popular choice for people changing jobs, and for retirees, is a direct rollover of employer plan assets to a Traditional IRA. When you roll over your retirement plan distribution, you typically don’t pay taxes on it. So you preserve that tax-deferred status and allow your assets to continue to grow. This type of rollover keeps those assets tax-deferred until you withdraw earnings when you’ve reached retirement, and keeps assets in one place for simplified management, tracking and recordkeeping. IRAs can also provide an opportunity to withdraw funds penalty-free in the event of an early retirement (before age 59½) by taking substantially equal periodic payments. There are some qualified retirement plans that offer similar options for taking early distributions, but many do not.

Cons: You can’t borrow money from an IRA like you can with a 401(k) plan. And, there are special tax advantages, upon distribution, for assets held in employer stock that an IRA can’t offer.

Additionally, while many state laws offer some protection from creditors when it comes to IRA assets, employer plans enjoy generally greater federal protections.

No matter which of these popular options you go with, the experts at Service Financial Group are here to help.

Want to learn more on this topic? Check out Service Financial Group’s upcoming webinar, Understanding Your Rollover Options, on March 14 at 6:00 p.m.

Service Financial Group professionals are not registered as a broker-dealer or investment advisor. Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Registered representatives of LPL offer products and services using Service Financial Group and may also be employees of Service Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Service Credit Union or Service Financial Group. Securities and insurance offered through LPL or its affiliates are: Not Insured by NCUA or Any Other Government Agency, Not Credit Union Guaranteed, Not Credit Union Deposits or Obligations, May Lose Value.