Did You Leave a Retirement Plan at a Former Job?

Did you leave behind a 401(k), 403(b), or 457 governmental deferred compensation plan at a former job–or are you about to? These are a few things to consider for your investments, but before making any moves, contact your plan administrator and, if necessary, a financial or tax adviser for complete information about the rules and tax consequences.

Option 1: Leave your savings with your former employer

Before settling on this alternative, review your plan’s investments, fees, services, withdrawal restrictions, and distribution rules. Then compare the plan with an IRA (individual retirement account) and, if you have one, your new employer’s retirement plan.

Option 2: Roll over your plan to a traditional IRA

Once you’ve left your employer, you have the option of directly rolling over part or all of the eligible distribution from your 401(k), 403(b), or 457 governmental plan to a traditional IRA. Rolling over your plan allows your savings to continue accumulating tax-deferred.

A traditional IRA may offer you a broader selection of investment options than your current or new employer-sponsored retirement plan. It also offers you and your beneficiaries more flexible and tax-favored distribution options than your employer retirement plan.

Rolling over your employer plan savings to a traditional IRA also gives you the option, if you’re eligible and after paying any income taxes due, to convert your savings to a tax-free Roth IRA. (You cannot roll over savings from your former employer’s plan directly to a Roth IRA. Talk to a Liberty Savings specialist about making the conversion.)

Option 3: Move your savings to your new employer plan

If you have a 401(k), 403(b), or 457 governmental plan with a former employer, you can roll over eligible distributions tax-free to any such plan that accepts rollovers.

When considering the alternatives, compare your new employer retirement plan with your current plan and an IRA. Evaluate the investments, services, withdrawal restrictions, loan provisions, distribution options, and fees.

Option 4: Cash out and pay taxes

As a last resort after you’ve left your job, you can withdraw part or all the vested portion of your employer-sponsored retirement plan. However, you’ll lose a significant chunk of your savings to federal income taxes, possibly state income taxes, and possibly to the 10% early withdrawal tax penalty.

In addition, your employer must withhold 20% up front as prepayment for the federal income taxes you’ll owe at tax filing time. You’ll also lose out on future years of earnings and tax-deferred growth.

Still not sure what to do? Liberty Savings partners with NorthEast Planning Corporation for investment counseling with members-only benefits. Contact us for more information on how to take advantage of these services.

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