Rollover Resources

What Are the Options?

As more Americans switch jobs, change careers, or retire altogether, they have to consider what to do with their retirement assets. There are several options to consider and each can make a significant difference in how much money is available at retirement. Here is a comparison of the advantages and drawbacks of the three options upon leaving an employer:

Roll over retirement plan assets to an IRA
Leave assets in the employer's plan or roll them into a new employer's plan
Cash out some or all of the retirement assets

Roll over retirement plan assets to an IRA account.

After leaving an employer, many people choose to transfer their retirement plan assets to an IRA where there is a better choice of investment options. Consolidating assets into an IRA also simplifies managing assets and may eliminate some fees.

To avoid the mandatory federal income tax withholding of 20%, the transfer of assets should be done through a direct rollover. In a direct rollover, the employer makes the withdrawal check payable to the IRA's custodian.

Note: Plan assets can be rolled into a Traditional Rollover IRA, but cannot be directly rolled into a Roth IRA.

Advantages

Drawbacks

Assets continue to grow tax-deferred until withdrawn.
Self-directed brokerage accounts generally offer more investment choice than the investment choices available in an employer plan.
Direct IRA rollovers avoid 20% federal tax withholding and 10% early withdrawal penalties.
By rolling over, different accounts can be consolidated into one, eliminating multiple administrative fees and making retirement assets easier to track and manage.
IRA rollovers offer future flexibility:

May be eligible to convert to a Roth IRA
Can later transfer to a new employer's plan if the plan allows

Loans are not available from IRAs so account holder cannot borrow against assets.
No special distribution alternatives, such as forward averaging, are allowed for IRAs.
Some accounts have fees.

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Leave assets in a former employer's plan or roll them into a new employer's plan.

Depending on an employer's plan rules, if the vested balance in the employee's retirement account is more than $5,000, it may be possible to leave those assets in the plan. Likewise, depending on an employer's plan rules, a new employee may be able to roll over assets from a previous employer's plan. (In some cases, there is a waiting period before this can be done.)

With both of these options, savings will continue to be tax-deferred as they would with rolling over to an IRA. These options differ from rolling over into an IRA in two important ways:

An employer plan generally has fewer investment choices than an IRA offers through a brokerage firm.
Some employer's plans allow employees to borrow against the assets in their account, a feature not available with an IRA.

Advantages	Drawbacks
Assets continue to grow tax-deferred until withdrawn. Maintaining retirement assets in a tax-favored plan avoids 20% federal tax withholding and 10% early withdrawal penalties. By rolling over to a new employer's plan, existing retirement plan money is consolidated with any new plan contributions. Some employer plans allow loans.	Investment choices may be limited within the new plan. Some employer plans may limit withdrawals and exchanges between investments. Some employer plans may not allow leaving assets in the plan, especially if the balance is under $5,000. Some employer plans may not accept rollovers of assets from other plans. Some plans charge fees.

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Cash out some or all of the retirement assets.

Withdrawing the assets from an account in an employer's plan provides quick access to money, but there are stiff penalties to pay: 20% of the amount distributed will automatically be withheld for federal income taxes (and an additional percentage may be withheld for state income tax). Moreover, there may be an additional 10% penalty for early withdrawal if the account holder is under age 59½. Taxpayers in the 28% federal tax bracket, for example, must pay 28% taxes on the entire distribution amount (prior to penalties) since it is treated as ordinary income. That means 38% of the assets could be lost to taxes and penalties--and that's not counting state and local taxes that may also apply.

Advantages	Drawbacks
Cashing out provides immediate funds that can help with expenses.	10% penalty may need to be paid. Income taxes must be paid on the entire amount in the year the distribution is received regardless of when they are spent. Taxes could increase if the amount distributed places the account holder into a higher tax bracket. Assets lose tax-deferred status, along with the potential for tax-deferred growth.

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