Financial Focus Changing Jobs or Retiring? Consider an IRA Rollover

In the near future, are you going to change jobs or retire? If so, you’ll have a lot of things to think about. And one of the most important considerations is what to do with the money you’ve accumulated in your former employer’s 401(k) plan.

What are your choices? First, of course, you could always cash out your 401(k), but if you do, you’ll receive only 80 percent of the total, because your employer is required to send the other 20 percent to the IRS, to be applied to your taxes. Also, if you’re under age 59 1/2 when you take the lump sum, you may have to pay a 10 percent penalty. However, if you really need the money - possibly to start your own business - your retirement plan may be your biggest source of available cash. But once you’ve used it, it’s gone, and you’ll have to start rebuilding your retirement savings from other sources.

You may be able to move your 401(k) money to your new employer’s plan, if the plan allows it. Or, you may even be able to keep your money in your former employer’s plan. You can’t make additional contributions, but if you particularly like your investment options and how the plan is administered, this option may make sense.

Your other choice is to roll over all or part of the taxable portion of your 401(k) - pre-tax contributions, employer contributions and all earnings - into a new or existing “traditional” IRA. (You can’t directly transfer 401(k) funds into a Roth IRA. You can convert your traditional IRA to a Roth later on, but you’ll have to pay taxes on the conversion.)

By rolling your retirement plan over to a traditional IRA, you can build up the value of your existing account and continue making contributions. With the tax legislation enacted in 2001, you have the flexibility of moving your traditional IRA into a future company retirement plan if the plan allows for it.

If you roll your company retirement plan into an IRA, you’ll get some key advantages. First, you’ll avoid all immediate taxes and penalties. Second, you’ll continue to benefit from tax deferral. And third, IRAs offer you a wide variety of investment options. You can fund your IRA with stocks, mutual funds, bonds or government securities. By contrast, even a good 401(k) plan may have only a dozen or so investment funds to choose from.

Be aware, though, that if you do roll over your 401(k) distribution into a traditional IRA, you will lose the ability to take out a loan from this funding source. You may have found that borrowing from your 401(k) is preferable to other forms of loans. That’s because when you repay a 401(k), you are essentially paying yourself back, with interest.

Before making any moves with your 401(k), see your tax adviser. Your 401(k) may be the largest single source of money you ever have available, so make sure you take good care of it.

This article was submitted by the financial representatives of Edward Jones in Hagerstown: Greg Garner, 301-733-9465; Dave Walker, 301-766-7300; Joan Bowers, 240-420-8514; and John R. Pullaro, 301-824-7726.