Changing or leaving a job can be a tumultuous experience. Even under the best of circumstances, making a career move requires a series of tough decisions, not the least of which is what to do with the funds in your old employer-sponsored retirement plan.
Some people choose to roll over these funds into an Individual Retirement Account, and for good reason. More than 25% of all retirement assets in the U.S. are held in IRAs, and more than 50% of traditional IRA owners funded all or part of their IRAs with a rollover.¹,²
Generally, you have three choices when it comes to handling the money in a former employer’s retirement account.
You can cash out of the account. However, if you choose to cash out, you will be required to pay ordinary income tax on the balance plus a 10% early withdrawal penalty if you are under age 59½.
You may be able to leave the funds in your old plan. But some plans have rules and restrictions regarding the money in the account.
You can roll the money into an IRA. Why do so many people choose an IRA rollover? Here are a few of the major benefits:
Rollovers may preserve the tax-favored status of your retirement money. As long as your money is moved through a direct “trustee-to trustee” transfer, you can avoid a taxable event.³ In a traditional IRA, your retirement savings will have the opportunity to grow tax-deferred until you begin taking distributions in retirement.
An IRA rollover may open up your investment choices. When you stick with your former employer’s retirement plan, you are typically limited to the investments offered by the plan. With an IRA, you may have a much broader range of choices, giving you greater control over how your assets are allocated.
Rollovers can make it easier to stay organized and maintain control. Some people change jobs several times during the course of their careers, leaving a trail of employer-sponsored retirement plans in their wake. By rolling these various accounts into a single IRA, you might make the process of managing the funds, rebalancing your portfolio, and adjusting your asset allocation easier.
An IRA rollover may make sense whether you’re leaving one job for another or retiring altogether. But how your assets should be allocated within the IRA will depend on your time horizon, risk tolerance and financial goals.
IRA rollovers shouldn’t be taken lightly. You may benefit from a report I created some time back entitled, “Six Best Worst IRA Rollover and Decisions”.
1.2012 Investment Company Factbook
2.Distributions from traditional IRA and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
3.The information in this material is not intended as tax advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a tax professional for specific information regarding your individual situation.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2013 FMG Suite.
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.