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Chad Carlson

It is estimated that the average American will change employers 11 times in his or her lifetime. When you consider that you may have a retirement account balance each time you leave an employer, this is quite significant. When you switch jobs before retirement, the decision you make regarding what to do with your 401(k) or retirement savings account is an important one. In most cases, these will be your choices:

1. Leave the money in your former employer's plan.

2. Transfer the money to your new employer's plan.

3. Transfer the money into an Individual Retirement Account (IRA).

4. Liquidate your account.

According to a recent study, 45 percent of employees cash out their 401(k) plans when they change jobs. But as tempting as this may be, cashing out of any retirement plan before reaching age 59 ½ can be very costly. Here are some issues to consider:

· If you fail to transfer (or rollover) your money to an IRA or your new employer's plan within 60 days of a distribution, your current employer will be forced to withhold 20 percent of your account balance for federal taxes.

· If you cash in your retirement plan and decide to keep the money, you must pay federal and state income tax on your entire withdrawal. On top of that, the IRS may deem your payout a premature distribution. If so, that could result in an additional 10 percent early withdrawal penalty lumped on top of the taxes you'll owe.

When all is said and done, you could end up losing almost half of your original 401(k) savings.



Transferring to a New Plan

Taking your money with you to your new employer's plan is relatively simple as long as the new plan allows for transfers. This holds true for a 401(k), 403(b) and many other types of plans.

Know before you roll. While one of the benefits of moving money into your new employer's plan is having your retirement money consolidated into one account, you should learn as much as you can about the new plan before you roll over to it. Your new plan may offer a limited choice of investment options or there may also be other rules — such as withdrawal restrictions — that didn't apply in your last plan. Some plans require a predetermined time-period before you are eligible to participate or transfer your money into your new plan. This doesn't apply to an IRA. Talk with your financial advisor or someone in your new employer's benefits department before you make your decision.

What your new plan may give you. Rolling your money into your new employer's plan protects your savings from taxes and allows it to continue growing tax-deferred. There may be other benefits to your new plan as well. Most plans allow contributions by salary deferral, allowing you to save even more on a tax-deferred basis. As mentioned earlier, moving your savings into your new plan gives you the convenience of having all of your retirement assets in one location, which means your account information is contained in a convenient, single statement, not several. And if you're 50 years old or more, you may be able to make additional catch-up contributions beyond the limit of what the plan usually allows.



Rollover to an IRA

Transferring the monies that have accumulated in your retirement plan account over to a traditional IRA generally provides the most flexibility. When you do this, you're creating what's known as a "rollover" IRA. A rollover IRA lets you consolidate your retirement plan money, including any after-tax contributions you may have made, into one account

Continued tax-deferral. A rollover is treated like a transfer to your new employer's plan. You pay no taxes on these funds as long as they remain inside a tax deferred retirement account. This flexibility can be significant if you're trying to monitor investments that are in several places. By rolling your savings into an IRA, you benefit from the same tax-deferred accumulation privilege that you enjoyed through your employer's retirement plan.

More investment options. A typical retirement plan has a limited selection of investment choices, while an IRA may give you a much wider range of options. Additional flexibility to select investments may make it easier to create a comprehensive investment strategy that is right for you.

Greater control. An IRA normally has far fewer limitations and rules than an employer-sponsored retirement plan. For example, penalty-free withdrawals from an IRA are allowed for a qualified first home purchase (up to $10,000), higher education, death, disability, and certain health insurance and medical bills. In addition, an IRA typically provides much better options for your named beneficiaries including techniques for "stretching" your tax-deferral for the benefit of non-spousal beneficiaries. And although you are subject to income-eligibility requirements, you may also be able to make future contributions to your rollover IRA. The limit for 2006 is $4,000 while if you are 50 or older; the limit is raised to $5,000.

While there may be times in your life when you absolutely need the money, you'll want to give careful consideration before dipping into your retirement savings. The long-term impact may out-weigh the short-term benefit of accessing your money today.



Chad Carlson is a financial advisor with Delta Trust Investments, Inc. in Little Rock.

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