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Options For Your Money In Employer-Sponsored Retirement Accounts When Switching Jobs.

The new issue of T. Rowe Price Investor magazine just showed up here, and as usual it’s got some great stuff in it. (All of our retirement/mutual funds are held over there) This month they have an article on 4 paths you can follow with your retirement savings that were held in an employer-sponsored savings plan, when you switch jobs:

Roll The Money Into A Rollover IRA

Pros Include:
Maintains tax-deferred status
Allows penalty-free withdrawals for certain circumstances

Leave The Money In Your Former’s Employer’s Plan

Pros Include:
Maintains tax-deferred status
Offers familiar investment options
Allows for penalty-free withdrawals if you separate from service and are 55+ (in most cases)

Cons Include:
May have minimum balance requirements
May restrict withdrawal options for beneficiaries

Move The Money Into Your New Employer’s Plan

Pros Include:
Maintains tax-deferred status
May permit loans
Allows for penalty-free withdrawals if you separate from service and are 55+ (in most cases)
May allow for delayed minimum distributions while you are still working

Cons Include:
Limits investment options to those of the new plan
Limits your access to withdrawals if you are still employed
May involve a waiting period prior to moving your money
May restrict withdrawal options for beneficiaries

Cash Out From Your Previous Employer’s Plan

Pros Include:
Provides immediate access to retirement plan assets

Cons Include:
Removes potential for tax-deferred growth and compounding
May incur an immediate 20% withholding on the distribution for prepayment of federal income taxes
Generates a 10% early withdrawal penalty if under 55 years old


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Comments (4)

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  1. WealthBoy says:

    If you ask me, cashing out is probably the least desirable option, particularly if you have a large sum coming out of the account. You’re likely to get slammed hard on the taxes, not to mention the 10% penalty if you’re under 55. If I were to leave my current job, I probably would not roll it into an IRA. I would either leave it or take it to my new employer, depending on whether my new employer’s plan has more/better investment options. My current employer’s plan is really lacking in investment options for small cap and international funds (basically only a single fund is available for each).

  2. David says:

    I agree – cashing out is a bad idea!

  3. Debbie M says:

    It’s hard for me to imagine a situation where I would not roll it into an IRA (eventually, after I got over my laziness). I suppose in some cases employers do negotiate lower fees. And I know they sometimes do have access to investments that are closed to new investors. And if it’s in a pension, you might be earning a guaranteed positive interest rate while the stock market is plummeting. But generally one’s options are so much greater in an IRA that it’s a no-brainer to me.

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