Options to consider when retiring or changing jobs

April 24, 2017

 Anytime we leave a job or eventually retire, we must decide on what to do with our old retirement account(s). Understanding what your options are can help make sure you make the right decision for your specific situation. Below is a summary from JP Morgan’s Guide to Retirement which I think does a nice job highlighting each choice. If you ever need help figuring out what is best for you, never hesitate to reach out.

 

 

 

 

Rollover

 

Roll the retirement account into an IRA account (IRA rollover)

 

(May also roll the Roth-401(k) portion of a retirement account into a Roth IRA)

 

Potential Benefits

  • No income taxes or penalties for a direct rollover

  • Assets maintain tax-deferred status

  • Ability to make additional contributions subject to income limitations

  • Potential for a broader range of investment options

  • Opportunity to consolidate multiple retirement accounts

  • If balance includes employer stock, may be eligible for preferable tax treatment (Net Unrealized Appreciation) if the stock is not rolled over

Considerations

  • Loans are not allowed

  • Fees may vary and may be higher than what is charged in an employer plan

Leave it

 

Leave the money in former employer plan

 

Potential Benefits

  • Not a taxable event

  • Assets maintain tax-deferred status

  • If you are at least age 55 and are separated from service, you may be able to take withdrawals without penalties

  • Fees may be lower depending on plan size

Considerations

  • Investment options vary according to the plan and may be more limited

  • Ability to leave assets in the plan as well as ongoing options are subject to policies and contractual terms of the plan

  • Some plans may not provide periodic payments to retirees

Move to new employer

 

Move the assets into a new employer plan

 

Potential Benefits

  • No income taxes or penalties for a direct rollover

  • Assets maintain tax-deferred status

  • New employer plan may allow loans

  • Ability to make additional contributions potentially with a company match

  • Fees may be low based on plan and size of employer (number of participants)

Considerations

  • Investment options vary according to the plan and may be more limited

  • Assets are subject to policies or terms of new employer plan

Cash Out
 

Withdraw balance of assets or “cash out” of plan

 

Potential Benefits

  • Individual may use remaining funds (after taxes and potential penalties) for other purposes

Considerations

  • Upon withdrawal, account balance is subject to ordinary income tax on pre-tax contributions and investment earnings

  • 20% automatically withheld for taxes upon distribution

  • Additional 10% withdrawal penalty tax may apply for owners younger than age 59.5

  • Additional federal, state or local income taxes may apply

  • Loss of tax-deferred growth of assets

Conversion

 

Convert all or part of retirement account into Roth IRA (Roth IRA conversion)

 

Potential Benefits

  • May provide income tax diversification in retirement

  • After taxes are paid at conversion, future distributions are tax-free

  • Required minimum distributions do not apply at 70.5

Considerations

  • The pre-tax amount is included in gross income in the year of conversion (and is subject to the aggregation rule)

  • Sufficient taxable assets to pay income taxes owed is strongly recommended

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