Leaving Your Job? Your Retirement Savings Plan Options

Are you leaving your job and considering whether to take a distribution from your 401(k), 403(b), or governmental 457(b) plan? In general, you have the following four options when you’re eligible to receive a distribution from your employer retirement savings plan:

Option 1: Leave the money in the plan

• Your account can potentially benefit from continued tax-deferred growth (or potentially tax-free growth in the case of Roth accounts)
• While IRAs typically provide more investment choices than an employer plan, there may be certain investment opportunities in your particular plan that you can’t replicate with an IRA
• You can receive penalty-free distributions as early as age 55 (50 for qualified public safety employees) compared with age 59½ for IRAs
• Qualified plans generally provide greater creditor protection than IRAs

Note: This may not be an option if your vested plan balance is $5,000 or less; if you’ve reached your plan’s normal retirement age; or if the payment is a required minimum distribution.

Option 2: No rollover—take the distribution in cash

• This move defeats the primary purpose of your plan — saving money for retirement; you risk not having enough money at retirement to cover your expenses
• All or part of your distribution may be subject to federal (and possibly state) taxes, and the taxable portion may be subject to an additional 10% early distribution penalty tax if you haven’t reached age 55 (50 for qualified public safety employees); this may significantly reduce the amount you’ll actually receive
• You’ll lose the benefit of continued tax-deferred (or tax-free) growth

Note: If your distribution includes employer stock or other securities, special tax rules may apply that can make taking a distribution more advantageous than making a rollover. Consult a tax professional.

Note: Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, penalty-free withdrawals of up to $100,000 will be allowed in 2020 for qualified individuals affected by COVID-19. Individuals will be able to spread the associated income over three years for income tax purposes and will have up to three years to reinvest withdrawn amounts.

Option 3: Roll the funds over to an IRA

• Your account can benefit from continued tax-deferred growth
• There are generally more investment choices with an IRA
• You can move your money across various investments offered by your IRA trustee,
• and you can move your IRA dollars among different IRA trustees/custodians (using direct transfers)
• With an IRA, the timing and amount of distributions are generally at your discretion [however you must start taking required minimum distributions (RMDs) from traditional IRAs after reaching age 72]

Option 4: Roll the funds over to your new employer's plan

• This offers all of the advantages of Option 1
• You can consolidate your employer plan retirement savings
• You may be eligible for a plan loan, and you may be able to delay required distributions beyond age 72

One of the most common questions people ask is: Should I roll over my retirement money to an IRA or to another employer’s retirement plan? Assuming both options are available to you, there is no right or wrong answer to this question. There are strong arguments to be made on both sides. You need to weigh all of the factors and make a decision based on your own needs and priorities. If your distribution is eligible for rollover, you’ll receive a statement from your employer outlining your rollover options. Read that statement carefully. You cannot roll over hardship withdrawals, required minimum distributions, substantially equal periodic payments, corrective distributions, and certain other payments.

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Information provided by Broadridge Investor Communication Solutions, Inc. Copyright 2020

* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the Credit Union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. UMassFive College Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to Credit Union members. CUSO Financial Services, L.P. (CFS) and its Registered Representatives do not provide tax or legal advice. Clients should always check with their tax advisor before engaging in any transaction involving IRAs or tax-advantaged investments. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.