Retirement Plan Strategies When you Change Jobs (or Retire)

Retirement Plan Strategies When you Change Jobs (or Retire)

June 10, 2012

Leaving a job creates opportunities with qualified retirement plans – 401(k), 403(b), TSP – that can enhance (or harm) your future financial health.

The four choices for retirement plans when going to a new employer or retiring are:

  1. Leaving investments in your current retirement plan;
  2. Transferring to the new employer’s plan;
  3. Rolling over to an IRA; or
  4. Taking the money out of the plan.

The first three choices do not require you to pay taxes or penalties and allow tax-deferral to continue. One of the 401(k)s or an IRA may offer a better set of investment choices or fees. Financial planners can directly manage an IRA investment but not the investments in retirement plans. Consolidating your investments makes administration easier.

The fourth choice – taking the money out of the account and paying taxes – is usually the sign of a financial problem. Workers who have to take funds from their retirement plans clearly have a problem. If you are retiring, having to immediately use retirement plan funds to pay for current expenses indicates that you might not be ready for retirement.

Don’t ignore practical issues. Your current employer may require a minimum balance higher than what you have. Your new employer may require six months of employment before you participate in their 401(k). Forms are often confusing. If you own company stock inside a 401(k), you can lose some tax advantages if your transfer the stock out of the employer’s plan.

My advice? Get some advice from a financial professional. It’s a good time for a review.