Make wise retirement plan choices when you change jobs
When you change jobs you're likely to face a decision with major tax consequences - what to do with the balance in your retirement plan.
Generally, you'll have four choices.
Leave the money in the current plan. You may be able to leave the money invested in your old employer's plan, but this has disadvantages. First, your investment choices will be limited to those offered by that plan. Second, you may find it inconvenient to communicate with the plan administrator when you're no longer employed by the company.
Roll the money directly into your new employer's plan. If your new employer has a retirement plan, you might be able to transfer balances in, but there's often a waiting period.
Take a cash distribution. This is usually the least attractive option. You'll owe income tax on the distribution, and you may be liable for an additional 10% early distribution penalty. Moreover, you'll lose the ability to continue tax-deferred earnings on your retirement savings.
Move the money into a rollover IRA. You can roll your retirement money into an IRA. Later, you may be able to roll the money into a new employer's plan. With this option, it's advisable to do a trustee-to-trustee transfer. If the funds come directly to you, you have 60 days to redeposit them into an IRA. But if you miss the deadline, you'll owe taxes and possibly penalties on the entire amount. Also, the trustee is required to withhold 20% income tax from a distribution made directly to you. Unless you make up the 20% from other sources when you put your money into a rollover IRA, that missing amount will be treated as a taxable withdrawal. A trustee-to-trustee transfer avoids these problems.
