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401(k) or IRA: What to do when you leave your job?

401(k) or IRA: What to do when you leave your job?

September 15, 2021

Have you left your job or started a new one? What happens to the money you have saved in your employee retirement plan?

If you have been terminated by your employer (voluntary or otherwise), you have
4 choices when it comes to your retirement plan money:

  • Cash it out (and lose part of it to taxes and possible tax penalties)
  • Leave the money in the plan (with only a handful of investment options)
  • Roll it into a new workplace retirement plan (with limited investment choices)
  • Roll it over into an IRA (with no taxable event occurring, and with the ability to direct the money into many different types of investments)

Consider an IRA rollover. This is a smart move, and we can help you accomplish it. Through a trustee-to-trustee transfer, you avoid the 20% withholding tax that would otherwise be incurred by simply taking a distribution from the old plan and depositing that money in an IRA. 

Want more tax-deferred growth for your retirement savings? An IRA rollover allows that to happen. You get continued tax deferral, you retain personal control over the money, and you can revise or change your investment mix as you wish.

Roth conversion? Not ever having to pay taxes again on your retirement funds sounds appealing, right? A Roth conversion - paying taxes now so you don't have to later - isn't typically something you are able to do within an employee retirement plan though, so rolling into an IRA will be necessary for this. However, there are potential pitfalls to Roth conversions, and depending on your situation, there is a wrong way to do it. As a Roth conversion is a taxable event, you will want to be strategic with how much you convert in one year so that you are not bumping into a higher tax bracket. Typically, spreading it over multiple years is an effective strategy (there are different methods based on whether you are over/under 59 1/2 years old), but what is the right amount to convert for you? Do you convert all of your tax-deferred dollars to tax-free (Roth), or do you keep some in a tax-deferred account? This is where the 'Standard Deduction' comes into play, as you will be able to deduct some (or potentially all) of your income from tax-deferred (IRA) dollars during retirement, which is particularly important when Required Minimum Distributions (RMDs) begin at age 72. We can expand upon this in another post. Of course, we can help you with your specific situation now, if you reach out.

If you have questions about what is best for you, we will be happy to help you weigh your options. Of course, the more you study the options, the more you realize that the IRA rollover stands out as the smart choice - the benefits are many, but the flexibility alone is generally enough to compel most anyone.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.