Taxation

Job Changes, Your Retirement Plan and Rollovers

What happens to your retirement assets when you leave one employer for another? The answer depends upon what your current retirement plan allows and which allowable option you choose. Generally, you'll have several choices, including:

  • Leaving your savings with your former employer
  • Rolling over your savings to your new employer's plan
  • Rolling over your savings to a traditional individual retirement account (IRA)
  • Cashing out your savings and paying taxes

If you decide to roll over your assets, you'll keep the same tax benefits and avoid possible tax penalties. A tax-deferred rollover happens when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it within 60 days to another eligible retirement plan.

If you're in a defined contribution plan, such as a 401(k) plan, and you leave your employer before retirement age, usually you'll be allowed to transfer your account balance out of your employer's plan.

Sometimes your options will be limited, depending on what your current plan is. If you're in a defined benefit plan, other than a cash balance plan, you'll most likely be required to leave the benefits with the retirement plan until you become eligible to receive them. If this is the case, make sure you update your personal information with the plan administrator regularly. Also, keep current on any changes in your former employer's ownership or address. If you're in a cash balance plan, you'll probably be allowed to transfer at least part of your account balance to an IRA or to a new employer's plan. You'll need to check the specifics of your new employer's plan.

Tax Benefits

An individual who receives an eligible rollover distribution from a retirement plan may generally defer income tax, as long as that distribution is transferred to another eligible retirement plan.

If you don't roll over the funds from one retirement plan into another plan, and you instead elect to receive a lump sum as a single payment from your plan, you may need to pay income taxes on the amount you receive and possibly a withdrawal penalty. You'll owe a tax penalty if you are under age 59½ and don't meet certain exceptions. Transferring your retirement plan account balance to another plan or an IRA when you leave your job will protect the tax advantages of your account and preserve the benefits for retirement.

Plans that Qualify for Tax-Free Rollover Treatment

For a tax-free rollover, a distribution from a qualified plan or 403(b) arrangement must be an "eligible rollover distribution," which is a distribution of any part of a participant's interest in a plan that isn't within any of the following exclusions:

  • One of a series of substantially equal periodic payments payable at least annually, over a period of at least ten years or over the life or life expectancy of the participant, or the joint life expectancy of the participant and the participant's designated beneficiary
  • A required minimum distribution
  • A corrective distribution, an excess deferral or an excess annual addition
  • A deemed distribution resulting from a participant loan
  • Dividends paid on employer securities
  • The taxable cost of current life insurance protection
  • A hardship distribution

Any distribution from an IRA or governmental 457(b) plan may be rolled over, except:

  • A required minimum distribution
  • A corrective distribution

Before You Make a Move

Check the withdrawal restrictions of your current plan to find out if you'll be subject to any sales charges or surrender fees before you roll over your employer retirement plan savings to your new employer plan or to a traditional IRA. If you decide to roll over your employer plan savings to a traditional IRA, arrange a direct rollover to the IRA trustee or custodian to avoid triggering income taxes and the 10% early withdrawal tax penalty.

Questions for Your Attorney

  • Is it better to roll over my retirement plan assets into another employer plan or into an IRA?
  • Is it ever a good strategy to take a lump sum from your employer's retirement plan?
  • Can my new employer's retirement plan refuse to allow me to roll over my assets from my former employer's plan?
  • Should I leave my assets in my former employer's plan if I think that plan is well-managed and meets my investment goals?

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