Changing Jobs or Retiring? 3 Options for Managing Your Retirement Plan
Most people participating in a 401(k) or other employer-sponsored retirement plan find that the management of it is largely automatic while they are working. But how do those on the cusp of leaving their company to either work elsewhere or retire begin to take the reins and steer their savings plan in the right direction?
If you haven’t yet figured this out, you’re not alone. According to a survey by Cerulli Associates, a research and consulting firm, 25 percent of 401(k) participants 45 and older say they have not yet decided what they will do with their retirement account when they retire. Another 25 percent also say they have not decided, but plan to ask their financial advisor for guidance.
This lack of direction among investors is easily understood. 401(k) plans vary widely, offering very different distribution options. Some allow lump-sum disbursements only. Others might offer partial withdrawals, but this remains a fairly limited option among companies.
You will find though that most retirement saving plans do offer you a choice of distribution options for managing the money accumulated in your account. Since some choices result in a greater tax liability than others, it’s important to understand the consequences before making any decisions about taking distributions from your plan.
Know your options
Generally, you have three options for managing the money in your retirement plan when you change jobs or retire:
Keep your money in the plan:
When retiring, it might make sense to choose this option if your spouse is still working or if you have other sources of retirement income. Or, if you're starting your own business when you leave your current job, keeping your retirement money in your former company's plan may help protect your retirement assets from creditors, should your new venture run into unforeseen trouble.
Move your money to another retirement account:
Take a cash distribution:
Understand the tax consequences of a lump-sum distribution
The Potential Cost of a Cash Distribution
-20% Tax Withholding
= Cash Amount Before Taxes
-$2,000 Tax Withholding
= $8,000 less any income tax underpayment
Contact your plan administrator for any other options available under your plan. Then be sure to consult a qualified tax and financial planning professional to ensure that your planning decisions coincide with your financial goals.
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Wealth planning strategies have legal, tax, accounting and other implications. Prior to implementing any wealth planning strategy, clients should consult their legal, tax, accounting and other advisers.