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Take Your Retirement Plan With You

Janus Report

April 1, 2010

Leaving your job? Don't forget your 401(k)

With unemployment in the U.S. reaching levels not seen in a generation¹, many people today face decisions about what to do with assets from their 401(k) or other employer-sponsored retirement plan after they leave a job or are laid off. If you're facing this situation, the decision you make could have a dramatic impact on your retirement finances. Here are four options that may be available to you when you leave a job:

1. Take the money in a lump sum. If you've been laid off from your job unexpectedly and are facing immediate financial duress, this may be a tempting option. After all, it might be a large amount of cash that could help tide you over until you find new employment.

However, there may be a high price to pay for taking a lump-sum distribution. This starts with a possible 10 percent penalty if you're under age 59 1/2. Next, your employer is required to automatically withhold 20 percent of the distribution in order to pay some of the income taxes due. The net proceeds after taxes and penalties may be 30 percent less than the account balance. Additionally, there may be mandatory or elected state withholding amounts that affect the check amount. Generally, the 10 percent penalty is not taken from the amount of the distribution but payable at the time the employee files the tax return for the year of the distribution due to possible exceptions that may apply to the penalty.

2. Leave the money with your former employer. Depending on provisions of your former employer's retirement plan, you might be allowed to leave your assets in the plan.

This is often the easiest option, but may not always be the best one: The plan is already set up and you don't really need to think about what to do with the money, but you may lose some control and are often less likely to review and manage the account.

3. Roll over the money into an Individual Retirement Account (IRA). Assets from a former employer's qualified retirement plan can be transferred into an IRA with an IRA rollover.

There are two different kinds of IRA rollovers: direct (or trustee-to-trustee) and indirect. With the former, the These resources can help you decide what to do with your retirement plan when you leave your job. Direct and Indirect Rollovers What's the difference? Learn more here. Direct Rollover IRA Here's one way to make sure your retirement assets maintain their tax-deferred status. retirement plan assets are rolled directly into the IRA, without you ever touching them. With an indirect rollover, you would receive the money or assets and then have 60 days to roll them over into the IRA yourself. However, 20 percent of the plan balance will be automatically withheld from this amount. To avoid incurring taxes on the amount withheld, you must contribute this 20 percent from other funds along with the proceeds from your distribution check.

4. Move the money into a new employer's qualified retirement plan. If you're taking a new job, this may be an attractive option, assuming your new employer's retirement plan allows such transfers. But, first, investigate the investment options that are available in the new plan. If they aren't as robust as you'd like, opening your own IRA and rolling the assets into it could give you more investment flexibility.

1The national unemployment rate was 10 percent in December 2009. Source: Bureau of Labor Statistics

An IRA should be considered a long-term investment. IRAs generally have expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be subject to taxes and penalties. Maximum contributions are subject to eligibility requirements. Depending on your eligibility, you may not be able to contribute the maximum amount. For more detailed information about taxes, consult IRS Publication 590 or your tax adviser regarding your personal circumstance.

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