Taking Control of Your Retirement Savings

When you leave your job or retire, you have an opportunity to manage your funds in an employer-sponsored retirement plan such as a 401(k), 403(b), or government 457(b) plan. Depending on the situation, you generally have four options.

Rollover

The approach that gives you the most control over the funds is to transfer some or all of the assets to an IRA through a rollover. IRAs typically offer a wider variety of investments than employer plans and enable you to consolidate your retirement assets in a single account. Moreover, the IRA is yours to keep and control, regardless of your employment situation.

You can generally transfer funds without tax consequences from a traditional employer account to a traditional IRA, or from a designated Roth employer account to a Roth IRA. Employer matching funds are allocated to a traditional account even if the employer matches your Roth contributions. So you may want to roll funds to both a traditional and a Roth IRA, depending on your situation.

If you want to move funds from a traditional employer account to a Roth IRA, the rollover is considered a conversion and you would owe income taxes on the taxable portion of the rollover amount (generally the whole amount minus any after-tax contributions). Under current tax law, if all conditions are met, the Roth IRA will incur no further income tax liability, regardless of how much growth the account experiences. And unlike employer-sponsored plans and traditional IRAs, a Roth IRA is not subject to required minimum distributions during the original owner’s lifetime.

Be sure your rollover is executed properly to preserve the tax-advantaged status of the funds. You can typically arrange a direct rollover, also called a trustee-to-trustee transfer, by contacting the administrators of your old employer-sponsored plan and your IRA. The transfer may be electronic, or you could receive a check made out to the receiving IRA trustee, which you should mail to the appropriate address. There is no withholding, and the money never passes through your hands.

If you receive a check made out in your name, 20% of the distribution will generally be withheld for federal income taxes. In order to retain the tax-advantaged status, you must roll the distribution, including the 20% withheld, to the IRA within 60 days; otherwise it will be considered a taxable distribution. You would have to pay the 20% that was withheld out of your own funds and wait for a potential tax refund of the withheld amount. So it is usually better to execute a direct rollover.

Reasons to Roll

Almost three out of five households who owned traditional IRAs in 2021 had executed at least one IRA rollover from an employer-sponsored retirement plan. These were the top reasons for the most recent rollover.

Source: Investment Company Institute, 2022 (multiple responses allowed)

Rollover Alternatives

If you don’t want to transfer the funds to an IRA, you generally have three other options.

Leave assets in former employer’s plan. If your vested portion of assets in the employer-sponsored retirement plan exceeds $5,000, you generally can keep it in the plan until you reach the plan’s normal retirement age. This strategy might make sense if fees are low and you are satisfied with the investment options. Your plan may offer certain investments not available in an IRA, and the cost structure for plan investments may be more favorable than for those in an IRA. Keep in mind that you can no longer contribute to or borrow from a former employer’s plan, and you might have to manage multiple retirement accounts.

Transfer assets to a new employer-sponsored plan. You might prefer this approach if you are moving on to a new job. Again, your decision may depend on the available investment options and expenses and whether the new plan allows you to transfer the assets.

Withdraw the money. Cashing out is generally unwise because you would pay current income taxes and lose out on potential tax-advantaged growth. For immediate cash, you could make a partial withdrawal and preserve the tax-advantaged status of the remaining funds through one of the other options, including a direct rollover.

Distributions from traditional IRAs and traditional employer-sponsored retirement plans, and the earnings portion of nonqualified distributions from Roth IRAs and designated Roth accounts, are taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10% penalty, with some exceptions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must meet the appropriate five-year holding requirement, and the distribution must take place after age 59½, unless another exception applies.

Generally, employer plan assets have unlimited protection from creditors under federal law, whereas IRA assets are protected in bankruptcy proceedings only (state laws vary in the protection of IRA assets in lawsuits). If you hold appreciated employer stock in your plan, consider the negative consequences of rolling stock to an IRA or to a new employer’s plan.

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2023 Broadridge Financial Solutions, Inc.