Starting a new job?  This can be a very exciting time in your life.  However, it can also be stressful.  There are many factors to consider when deciding what to do with the money that you have already contributed to your former employer’s retirement plan. For some, consolidating those assets into a rollover IRA may be attractive due to the wide range of investment choices offered.  For others, it may be more beneficial to roll over the assets into their new employer’s plan. Before making any decisions, carefully consider all of your options.

Four Basic Choices
When changing jobs, there are typically four choices associated with your retirement account:
1. Liquidate your assets.
2. Leave the money in your existing 401(k)
3. Roll over the assets into your new employer’s plan.
4. Roll over the assets into a traditional IRA.
First you can withdraw the money from your 401(k) plan.  Dipping into your retirement savings can be tempting, especially if you have accumulated debt. However, be cautioned that you are subject to various taxes and early withdrawal penalties (if you are under 59 ½), which can put a significant strain on your nest egg.

Leave the Money Where It Is
Second, to leave the money in your former employer’s 401(k) plan, typically your vested funds must total $5,000 or more. Otherwise, you risk being “cashed out” involuntarily.  You might consider this option if there is a waiting period before you are eligible to roll over the assets into your new employer’s plan. Your assets will continue to grow tax deferred.  However, you will not be able to make any new contributions.

Roll Over Into the New Plan
Third, your new employer may offer the option to roll over the assets into their plan. This can be advantageous if you think you will need to borrow money from your retirement account.  Most 401(k) plans have provisions that will allow you to borrow against your assets (subject to certain limits but never in excess of $50,000).  The potential downside to this option is that the investment offerings within the new plan may be limited.  Each plan is different, so be sure to review the investment choices and consult with your financial advisor.

Roll Over Into an IRA
Finally, by opting for a rollover IRA you can consolidate your assets into a single account, which may give you greater flexibility and a wider selection of investment options. You can benefit from working with your financial advisor and investment specialist to find the precise mixture of funds that best reflects your needs and goals. This level of customization may not be available in your new employer’s 401(k) plan.  In the case of the unexpected, IRAs also have special provisions for taking early distributions penalty free.  Furthermore, a rollover IRA allows you to move your assets in their entirety without incurring taxes or penalties.  The example below illustrates the cost benefit of rolling over the assets versus liquidating the account.  Additionally, you can roll the assets back into a 401(k) at a later date.

Your financial advisor can assist you in determining which option is best for you.

New Provisions for the 2006 Pension Protection Act!
In August of 2006, Congress passed the 2006 Pension Protection Act. An important provision of this legislation is that it allows for tax free gifts to qualified charities from IRAs. See details below:

Only taxpayers 70 ½ and over can take advantage of this provision Gift amounts up to $100,000 Applies to gifts made in 2006 and 2007 only Donations can be used to meet required minimum distribution requirements Can only be used for direct cash gifts to a charity (not charitable remainder trusts, pooled income funds, or gifts which might have a benefit like a free publication)

Contact Your Financial Advisor For Further Information

The information provided is general in nature and should not be construed as a solicitation, recommendation, legal or tax advice. The information supplied may not be accurate, complete or timely.  Laws of a particular state or which may be applicable to a particular situation may affect this information.  Tax laws and regulations are complex and subject to change.  Always consult with an attorney or tax professional regarding your specific legal or tax situation.