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Changing jobs: Retirement funds are for retiring

October 30, 2018
Greg Wambolt
When changing jobs, you have a choice: cash out or transfer your retirement funds to a new home. Unfortunately, most employees opt for the former when choosing the latter is almost always a better financial decision.
Say this to yourself: retirement funds are for retiring.

While it sounds silly, too few people adhere to this concept of saving for retirement. Nearly half of all workers in the United States take the money out of their retirement plans and spend it when they change jobs, according to the Federal Reserve Board Survey of Consumer Finances.

Changing or leaving a job is the leading cause for Americans withdrawing their retirement savings. Americans that deplete their retirement savings each time they take a new job opportunity see their retirement timeline stretching further and further out of reach.

It’s usually with the best of intentions that employees get started saving for retirement with one job, only to cash out of the account with a job change. Cashing out depletes what you’ve saved. Taxes of 20% and penalties of 10% for early withdrawal of rollover-eligible distributions can take a chunk out of your nest egg, money that could be the foundation for greater savings, compounding throughout your work career and ultimately, providing for a more comfortable retirement.

If the rule of thumb holds true and the average worker changes careers a minimum of seven times, that’s seven times ‘boom to bust’ if precautions aren’t made. And those precautions start with adherence to the mantra, retirement funds are for retiring.

Leave money where it is

You have options when it comes to parking your retirement accounts after separating from one company to move to another. One option is to keep those funds where they are. Most companies allow you to leave money with their company after you’ve moved on. But you won’t be able to contribute any more money to the retirement accounts and you’ll have to track where those funds are as the accounts move. While leaving your money with a past company is the easiest option, it’s typically a poor long-term solution.

Rollover to new employer’s plan

Move your money to accounts where it can grow by rolling the funds into one of your new employer’s qualified plans. It’s easier than you think to withdraw money from one 401(k) or individual retirement account (IRA) and reinvest those funds into your new employer’s traditional IRA or other employer-sponsored plan.

Direct account-to-account rollovers have no taxes withheld from the account at the time of the transfer. Funds that come to you direct, however, may be docked 20% in withholdings for federal tax and you’ll have 60 days to rollover the amount. Talk with your financial advisor to construct the most tax efficient transfer of funds.

Rollover to an IRA

If your new employer’s accounts cost more than you want to pay or don’t include the investment alternatives you are looking for, you could move your money to an IRA or ROTH IRA. Traditional IRA funds are contributed on a pre-tax basis and grow tax-deferred over time. Contributions and investment gains are taxed when you withdraw the money at or after age 59½. Early withdrawals may be subject to penalties.

Roth IRAs are taxed when contributions are made, eliminating the tax implications for contribution withdrawals once you reach age 59½. Work with your financial advisor to best manage the income caps and contribution limits that come with these accounts.

Execute the rollover

Pave the way for a smooth job transition by starting the process to rollover your retirement funds before you leave your current place of business. Contact your financial advisor or HR department for the documents necessary to initiate the rollover and plan for where the funds should most tax efficiently go.

This way, as your career moves forward, so too will your retirement plans. Don’t hesitate to contact us if you have any questions, or need some guidance on this process.

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