Did You Leave a Retirement Plan at a Former Job?/ November 12th, 2012
Did you leave behind a 401(k), 403(b), or 457 governmental deferred compensation plan at a former job—or are you about to? If so, depending on your situation and assuming you're not ready to retire, you generally have four options for your savings. Before making any moves, contact your plan administrator. If necessary, also consult a financial or tax adviser for complete information about the rules and tax consequences.
Option 1: Leave your savings with your former employer.You may be able to leave your retirement plan with your former employer. However, if your balance is $5,000 or less, your employer might require you to take your money. Before settling on this alternative, review your plan's investments, fees, services, withdrawal restrictions, and distribution rules. Then compare the plan with an IRA (individual retirement account), a Roth IRA and, if you have one, your new employer's retirement plan. For example, the former employer's plan might offer investments not available in an IRA, such as low-cost institutional mutual funds, funds with competitive long-term performance that are closed to new investors, or stable value funds or fixed accounts that preserve your principal. On the other hand, your current employer plan might only have limited investment options.
Option 2: Roll over your plan to a traditional IRA or a Roth IRA.Once you've left your employer, you have the option of directly rolling over part or all of the eligible distribution from your 401(k), 403(b), or 457 governmental plan to a traditional IRA. Rolling over your plan allows your savings to continue accumulating tax-deferred. You can also roll over your plan to a Roth IRA; your rollover funds to a Roth will be taxed—but if you think your tax bracket will be higher at retirement, this might make sense.
If you're still working, you can make new contributions to a traditional IRA or Roth IRA.A traditional or Roth IRA may offer you a broader selection of investment options than your current or new employer-sponsored retirement plan. Specifically, IRAs allow you to invest in most types of savings and investments, including CDs/share certificates, Treasury securities, mutual funds, and individual stocks and bonds. And if you have an existing IRA or other accounts, consolidating your retirement savings with one provider streamlines your paperwork, makes it easier to develop and maintain your investment plan, and simplifies your required minimum distribution calculations when you reach age 70½. A traditional IRA also may offer you and your beneficiaries more flexible and tax-favored distribution options than your employer retirement plan. Furthermore, if you're still working, you can make new contributions to a traditional IRA until age 70½. Traditional IRAs, however, don't offer loans, as may any new employer plan you have. You may also consider a rollover to a Roth IRA. The amount you convert will be taxed, but withdrawals after age 59½ are generally tax-free. To determine which IRA suits you, consult a certified financial adviser or an IRA specialist at your credit union. This calculator can give you an idea about which is a better option for you as well.
If your balance is $5,000 or less, your employer might require you to take your money.