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Cents and Sensibility Guy Steele |
Leaving your job means
looking at retirement planIF you decide to leave your job, you'll have many issues to consider and some financial decisions to make. One of the most important questions you'll need to ask yourself is this: What should you do with your 401(k) or other employer-sponsored retirement plan?
Fortunately, you have several options, including the following:
» Taking the money in a lump sum. If you have lost your job, you may be under financial stress. This may tempt you to cash out your retirement plan and take the money as a lump sum. And if your plan is your only source of savings, you may not have much choice. But if you have any other financial resources to draw on, you might want to avoid taking the lump sum. If you liquidate your plan, you'll no longer benefit from tax-deferred earnings growth. Furthermore, your employer must withhold 20 percent from your distribution -- and if you're under 59 1/2, your distribution may be subject to a 10 percent penalty.
» Leaving the money in your plan. You might be able to leave your money in your former employer's retirement plan, if the plan permits. This could be a good option if you are pleased with the investment choices available in the plan. But if you're not, you may want to consider other possibilities.
» Moving the money into a new plan. You may be able to move the money from your old plan into a new employer's plan, if the new plan allows such transfers. This move might make sense if your new plan offers attractive investment options.
» Rolling over retirement assets into an IRA. Depending on your individual situation, this rollover option could be your best choice. You'll avoid the 20 percent withholding and current income taxes on your retirement plan distribution. Plus, you'll keep your retirement savings growing on a tax-deferred basis. And you'll have an almost unlimited array of investment choices. Within your IRA, you can even build a diversified portfolio to reflect your risk tolerance, time horizon and long-term goals. Finally, once you move your retirement account into an IRA, you can later convert to a Roth IRA, so you can eventually make tax-free withdrawals, provided you meet certain conditions. Keep in mind that when converting a traditional IRA to a Roth IRA, you will generate a tax liability.
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Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688