There’s a lot to think about when you change jobs, and it’s easy
for a 401(k) or other employer-sponsored retirement plan to get lost in the
shuffle. But to keep building tax-deferred savings, it’s important to make an
informed decision about your old plan. First and foremost, don’t take a lump-sum
distribution from your old employer’s retirement plan. It generally will be
taxable and, if you’re under age 59½, subject to a 10% early-withdrawal
penalty. Here are three tax-smart alternatives:
1. Stay put. You may
be able to leave your money in your old plan. But if you’ll be participating in
your new employer’s plan or you already have an IRA, keeping track of multiple
plans can make managing your retirement assets more difficult. Also consider
how well the old plan’s investment options meet your needs.
2. Roll over to your new employer’s plan. This may
be beneficial if it leaves you with only one retirement plan to keep track of.
But evaluate the new plan’s investment options.
3. Roll over to an IRA. If you
participate in your new employer’s plan, this will require keeping track of two
plans. But it may be the best alternative because IRAs offer nearly unlimited
investment choices.
If you choose a rollover, request a direct rollover from your
old plan to your new plan or IRA. If instead the funds are sent to you by
check, you’ll need to make an indirect rollover (that is, deposit the funds
into an IRA) within 60 days to avoid tax and potential penalties.
Also, be aware that the check you receive from your old plan
will, unless an exception applies, be net of 20% federal income tax
withholding. If you don’t roll over the
gross amount (making up for the withheld amount with other funds),
you’ll be subject to income tax — and potentially the 10% penalty — on the
difference.
There are additional issues to consider when deciding what to do
with your old retirement plan. We can help you make an informed decision — and
avoid potential tax traps.
© 2016
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