Your IRA rollover guide

Preparing for retirement |

Whether you're changing jobs or retiring, find out what you may do with your retirement savings

When you retire or otherwise leave your employer, you will need to decide what to do with your accumulated retirement savings. Plan participants typically have five options to select from:

  • Leave the money in your current employer’s plan, if permitted;
  • Roll over the assets to your new employer’s retirement plan, if one is available and rollovers are permitted;
  • Roll over assets into an Individual Retirement Account;
  • Convert assets into a Roth IRA; or
  • Cash out the account value.

Each choice offers advantages and disadvantages, depending on desired investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and your unique financial needs and retirement plans. Here are some things you should consider.

Leave your money in the plan

If permitted, you can continue to take advantage of your employer’s retirement plan after you retire or terminate employment by simply leaving your money in the plan.

Advantages

  • Access to the same investment options offered to active employees. The investment options available through your employer’s retirement plan may be lower cost than what you can invest in outside of the plan.
  • Access to your account via toll-free phone and Internet services.
  • Continued tax-deferred growth until you begin taking distributions.
  • If you leave employment between age 55 and 59½, you may be able to take tax penalty-free withdrawals from the plan.
  • You may have access to loans from your retirement account.
  • Generally speaking, plan assets are protected from creditors.

Disadvantages

  • You may have a broader range of investment options outside of your employer’s retirement plan.
  • May reduce your control over future withdrawals and distributions, which are subject to the rules of your employer’s retirement plan.
  • May be subject to a fee each time a withdrawal is made.

Next step

If you want to leave your money in the plan, no further action is required.

Roll over the assets to your new employer’s retirement plan

If your new employer has a retirement plan and it accepts rollovers, you may want to consider moving your retirement assets to the new plan.

Advantages

Access to the same investment options offered to active employees. The investment options available through your employer’s retirement plan may be lower cost than what you can invest in outside of the plan.

  • Access to your account via toll-free phone and Internet services.
  • Continued tax-deferred growth until you begin distributions from the account.
  • If you leave employment between age 55 and 59½, you may be able to take tax penalty-free withdrawals from the plan.
  • You may have access to loans from your retirement account.
  • Generally speaking, plan assets are protected from creditors.

Disadvantages

  • You may have a broader range of investment options outside of your employer’s retirement plan.
  • May reduce your control over future withdrawals and distributions, which are subject to the rules of your employer’s retirement plan.
  • May be subject to a fee each time a withdrawal is made.

Next step

If you want to move your assets to your new employer’s retirement plan, talk with your new employer to understand the process you should follow.

Roll over the assets to an IRA

You can maintain the tax-deferred status of your retirement account by making a direct rollover to an IRA.

Advantages

  • You may have access to a broader array of investment options than what is available in your employer’s retirement plan.
  • Access to your account via toll-free phone and Internet services.
  • Continued tax-deferred growth until you begin taking distributions.
  • You may have more flexibility in receiving distributions as compared to your employer retirement plan.
  • Consolidate all of your retirement savings.

Disadvantages

  • The investment options available to you may have higher fees than what is available in your employer’s retirement plan.
  • There may be up-front charges on your investment into the IRA.
  • You will be required to start taking distributions from the IRA at age 70½, even if you are still working.
  • Penalty-free withdrawals generally may not be made from an IRA until age 59½.
  • No loans are available from IRA assets
  • State laws vary in the protection of IRA assets from creditors.

Next steps

Talk with your employer and request a direct rollover, or contact your IRA custodian.

Convert the assets to a Roth IRA

Depending on your tax situation, you may want to consider converting some or all of your tax-deferred assets in the retirement plan to a Roth IRA.

Advantages

  • Distributions from a Roth IRA are tax-free (including earnings) if taken after age 59½, and after the Roth IRA has been in existence for 5 years, which may be an advantage if you expect that tax rates will be higher in retirement.
  • There is no requirement that distributions must be taken at age 70½.

Disadvantages

  • The amount converted to a Roth IRA is taxed in the year of conversion. In addition to paying taxes, the additional income may push you into a higher tax bracket in the current year.
  • If you withdraw converted assets from the Roth IRA within 5 years of the conversion, you may be subject to an additional 10 percent tax penalty on the withdrawal.

Cash out the account value

You may take a full distribution of your account balance in one lump sum.

Advantages

  • You have access to your money to use in any way you wish.

Disadvantages

  • The entire distribution is subject to income taxes and possibly a 10 percent penalty tax.
  • Requires your employer to withhold 20 percent of the distribution as prepayment of federal income taxes. State tax withholding may also apply.
  • Cashing out your account balance could make it difficult for your retirement money to support you for the rest of your life.

The impact of cashing out your account balance

Suppose you had $100,000 in your retirement plan. What would be the difference between choosing a hypothetical $100,000 distribution in cash, versus choosing to keep that same $100,000 in a retirement plan?

As you can see in the illustration below, cashing out your retirement plan can lead to substantial tax consequences now and can have a great impact on your retirement income later.


Cash Distribution Maintain in Retirement Account 
 Hypothetical distribution $100,000  $100,000 
 Federal taxes1  -25,000
 10% early withdrawal penalty2  -10,000
 State and local income taxes3 -8,000 
 Remaining savings for retirement  $57,000 $100,000 
 Value after 15 years of growth4  $113,358 $275,9035 

Next steps

Talk with your employer about requesting a distribution.

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Everence staff

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Disclosure

Assumes 25% federal tax rate.

Assumes you left employer prior to age 55.

Assumes 8% state and local income tax rate (certain states also apply early distribution penalty).

Assumes 7% average annual return.

This value is before any taxes have been paid.

This material is intended to provide general information. It is not intended as legal or tax advice. Please consult your tax attorney or accountant about specific questions related to your situation.