by Bill Sheehy

The median job length is now 4.1 years*, so you will probably have seven to ten jobs before you retire. How you manage your retirement assets when changing jobs will have a huge and direct impact on your future financial health.

Case in point: "Cashing out" retirement plan assets before age 59½ will expose your savings to immediate income taxes and a 10% IRS early withdrawal penalty. On the other hand, several strategies can preserve the full value of your assets while maintaining tax-deferred growth potential.

Option #1: Leave the Money Where It Is If the vested portion of the account balance in your former employer’s plan has exceeded $5,000, you can generally leave the money in that plan. Any money that remains in an old plan still belongs to you and still has the potential for tax-deferred growth.** However, you won’t be able to make additional contributions to that account. This is usually a bad idea because it restricts your investment options to those offered in the plan which often are limited. In addition your former employer has no interest in your welfare and you have no control over their decisions regarding plan changes which may affect you.

Option #2: Transfer the Money to Your New Plan You may be able to roll over assets from an old plan to a new plan without any penalty or immediate taxation. This lets you consolidate retirement assets into one account.** The downside is that the new plan will have fewer investment options than if you transferred your money into an IRA account which you control. Many people maintain an IRA account for the purpose of receiving 401(k) transfers as they move from job to job.

Option #3: Indirect Rollover to your IRA If you opt for an indirect transfer, you will receive a distribution check from your previous plan equal to the amount of your balance minus an automatic 20% tax withholding. You then have 60 days to deposit the entire amount of your previous balance into an IRA which means you will need to make up the 20% withholding out of your own pocket. You will receive credit for the withholding when you file your next tax return. This option should be avoided in favor of option #4 below.

Option #4: Transfer the Money to a Rollover IRA To avoid incurring any taxation or penalties, you can enact a direct rollover from your previous plan to an individual retirement account (IRA).** For many people this is your best choice because it avoids any income tax ramifications, and it allows for maximum control over your investment options.

Cashing out takes a big bite of your assets through penalties and taxes, and stops the tax-sheltered compounding that creates healthy retirement plans.

If you’ve just left a job and are considering investment options, call Sheehy Associates for a free consultation. We’ll help you solve your retirement puzzle.

*Source: Bureau of Labor Statistics.

**Withdrawals will be taxed at ordinary income tax rates. Early withdrawals may trigger a 10% penalty tax.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

Bill Sheehy is owner of Sheehy associates Inc. which specializes in Retirement Planning for individuals and corporate 401(k) plans. He is a Certified Financial Planner, a Certified Employee Benefits Specialist, a Certified Fund Specialist and a Chartered Retirement Plan Specialist. He can be reached at or by calling 609-586-9100.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC

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