When You Change Jobs...
by Douglas Bolter Friday, August 22, 2008
Douglas Bolter is the President and owner of Integrity Financial Advisors, LLC of Wisconsin. He is an Advisor with Harbour Investments, Inc. that offers securities and advisory services and is a member of FINRA and SIPC. Harbour was named 2007 and 2008 Division 1 Broker Dealer of the Year by Investment Advisor Magazine. The award is one of the most prestigious distinctions bestowed upon independent broker dealer firms. In 2009 Doug was voted as one of the top Personal Wealth Managers in the Milwaukee Area that scored highest in the category “Best in Client Satisfaction” in a survey spearheaded by Milwaukee Magazine. As one of the first Certified Retirement Financial Advisors in Southeastern Wisconsin, Doug's depth of experience, knowledge, certification and licensing is a valuable resource for clients that require custom income planning due to job changes, termination, disability, structured settlements or retirement.
Full Bio
When you change jobs, you may have an important decision to make...what to do with your money in an employer-sponsored retirement plan, such as a 401(k) plan. Since these funds were originally intended to help provide financial security during retirement, you need to carefully evaluate which of the following options will best ensure that these assets remain available to contribute to a financially-secure retirement.
Take the Funds
You can withdraw the funds in a lump sum and do what you please with them. This is, however, rarely a good idea unless you need the funds for an emergency. Consider:
• A mandatory 20% federal income tax withholding will be subtracted from the lump sum you receive.
• You may have to pay additional federal (and possibly state) income tax on the lump sum distribution, depending on your tax bracket (and the distribution may put you in a higher bracket).
• Unless one of the exceptions is met, you may also have to pay a 10% premature distribution tax in addition to regular income tax.
• The funds will no longer benefit from the tax-deferred growth of a qualified retirement plan.
Leave the Funds
You can leave the funds in your previous employer's retirement plan, where they will continue to grow on a tax-deferred basis. If you're satisfied with the investment performance/options available, this may be a good alternative. Leaving the funds temporarily while you explore the various options open to you may also be a good alternative. (Note: If your vested balance in the retirement plan is $5,000 or less, you may be required to take a lump-sum distribution.)
Roll the Funds Over
You can take the funds from the plan and roll them over, either to your new employer's retirement plan (assuming the plan accepts rollovers) or to a regular IRA or, possibly, a Roth IRA, where you have more control over investment decisions. This approach offers the advantages of preserving the funds for use in retirement, while enabling them to continue to grow on a tax-deferred basis.
Take the Funds
You can withdraw the funds in a lump sum and do what you please with them. This is, however, rarely a good idea unless you need the funds for an emergency. Consider:
• A mandatory 20% federal income tax withholding will be subtracted from the lump sum you receive.
• You may have to pay additional federal (and possibly state) income tax on the lump sum distribution, depending on your tax bracket (and the distribution may put you in a higher bracket).
• Unless one of the exceptions is met, you may also have to pay a 10% premature distribution tax in addition to regular income tax.
• The funds will no longer benefit from the tax-deferred growth of a qualified retirement plan.
Leave the Funds
You can leave the funds in your previous employer's retirement plan, where they will continue to grow on a tax-deferred basis. If you're satisfied with the investment performance/options available, this may be a good alternative. Leaving the funds temporarily while you explore the various options open to you may also be a good alternative. (Note: If your vested balance in the retirement plan is $5,000 or less, you may be required to take a lump-sum distribution.)
Roll the Funds Over
You can take the funds from the plan and roll them over, either to your new employer's retirement plan (assuming the plan accepts rollovers) or to a regular IRA or, possibly, a Roth IRA, where you have more control over investment decisions. This approach offers the advantages of preserving the funds for use in retirement, while enabling them to continue to grow on a tax-deferred basis.