Instead of cashing out an employer-sponsored 401(k) plan early, perhaps due to a job change, it may be beneficial to consider a rollover1. Moving your retirement funds to an Individual Retirement Annuity (IRA) can help you eliminate penalties and take control of your savings.
There are four alternatives to consider when you have funds to potentially roll over:
Cashing out may not seem like a bad idea, especially if you aren’t going back to work right away. But your cash distribution will immediately shrink by 20 percent since your employer is required to withhold that amount. It’s essentially a down payment on the federal income taxes you’ll owe on the distribution. When tax time comes, you may owe even more than 20 percent, depending on your tax bracket. In addition, you may face a 10 percent penalty if you’re younger than age 55. And you’ll lose the potential benefit of tax-deferred appreciation.
Another option is to leave the money in your former employer’s plan (if you’re allowed to do so). You may still benefit from tax deferral, but you won’t be able to make new contributions and you’ll have to choose from the limited selection of investments within the plan.
You may be allowed to transfer the assets to your new employer’s retirement plan. You’ll avoid penalties and continue to defer taxes until withdrawal, but you’ll still have limited investment options. And keep in mind that not all plans accept such transfers.
Retirement plan assets can be “rolled over” directly to an IRA. Using a rollover IRA allows you to invest in almost any security. This flexibility can help you achieve your desired asset allocation and level of diversification over the course of your lifetime as your objectives change. And, because you never touch the money when rolling it over, you avoid penalties and continue to defer taxes until withdrawal2 – possibly at a time when you’re retired and may be in a lower tax bracket3.
Your Representative will prepare a customized plan that best meets your specific needs and budget. Get started by connecting with your Representative.
WEB68 - 4/1/2019