3 Reasons to Stick With Your Ex-Employer's Retirement Plan
When you leave a job, it only seems natural to cut all your ties to your former employer as quickly as possible. For many people, that means taking money out of their old employer-sponsored retirement plan account. Simply taking the money and spending it leads to immediate taxation for all, plus a 10 percent penalty for many younger workers, so it's smarter to move your money to your new employer's plan or to an individual retirement account. Yet in several cases, the smarter choice is simply to leave your money where it is. Let's look at three situations in which making no moves at all is the best answer.
1. When You Have a Great Low-Cost Plan
Most people can't wait to roll over their old 401(k) or other employer-sponsored retirement plan because it opens up new investment opportunities. If your ex-employer's plan was bad, then you can easily cut costs with the wider range of stocks, funds and other investments you have access to in an IRA. Moreover, if your new employer's plan has lower costs, it makes sense to switch.
%VIRTUAL-WSSCourseInline-792%Yet in some cases, your ex-employer's plan is the best option available. For instance, the federal government's Thrift Savings Plan offers some of the lowest investment fees in the business, yet it offers the same sort of exposure you'll get from higher-cost funds that will erode your overall returns. Similarly, even some private-employer plans give you access to institutional share classes of mutual funds that can greatly reduce your costs compared to what's available to most individual investors. As a result, before you give up your ex-employer's plan benefits, make sure you know whether you can do better elsewhere.
2. If You're Between Ages 55 and 59½
When you roll over a 401(k) into an IRA, you become subject to the rules that govern IRAs. Specifically, if you withdraw money from an IRA before you reach age 59½, then you have to pay a 10 percent penalty on the withdrawal.
Yet what many people don't realize is that for 401(k)s, you can make withdrawals between age 55 and 59 ½ without paying any penalties, as long as you lost or quit your job after turning 55. If you roll over that 401(k) to an IRA, though, you lose that right -- so be careful before you make that irrevocable decision.
3. If You Own Stock in Your Employer
Owning shares of your employer's stock can be a dangerous move for workers, as it essentially links two key parts of their economic stability to the health of their employer. If something happens to the company you work for, then not only will the value of the shares you own in your retirement account fall, but you'll also face the possibility of losing your job or facing cutbacks.
But when it comes time to consider rolling over your old 401(k), company stock gets special treatment. Unlike most assets, if you take a withdrawal of your company stock, then you'll only have to pay taxes and penalties on the amount you initially paid for the stock, rather than its current value at the time you take the distribution. More important, you don't immediately have to pay taxes on the increase in the stock's value since you bought it. As long as you keep holding the shares in a regular taxable account, your gains will be deferred from tax. When you do sell, moreover, you'll get the favorable long-term capital gains rate on any profit. By contrast, if you leave the stock inside the 401(k) or roll it over to an IRA, you won't owe any tax immediately, but the gains will eventually get taxed at your ordinary rate. Under some circumstances, it therefore makes sense to bite the bullet now to get bigger tax savings later.
Don't Be Hasty
When you leave a job, you might think it's automatically best to cut every single tie you have to it. But when it comes to your retirement account, think twice before you give up on what might be the best retirement-savings alternative you have.
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