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TAX TALK: Changing Jobs? Consider Your Options for Your Old Retirement Plan

Hal Zemel, CPA, J.D., LL.M. 10.17.2016 | TAX TALK

Changing jobs can be both exciting and stressful. The last thing on your mind is what to do with your 401(k) or other employer-sponsored retirement plan. You will likely have a few options to continue building tax-deferred savings.  First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty.

Here are three tax-smart alternatives:

  1. Stay put. Many employer plans allow you to keep your plan, even after your separation from service. If you are satisfied with your investment choices and the fees are not too high, you may want to leave your money in your old plan. However, if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult.
  2. Roll over to your new employer’s plan. If your new employer’s plan offers better investment options and/or lower fees, you may want to roll over your plan assets to your new employer’s plan. This may be beneficial if it leaves you with only one retirement plan to keep track of.
  3. Roll over to an IRA. If you are not satisfied with either of the plans offered by your old or new employer, you may want to roll over your plan assets to an individual retirement account (IRA). If you participate in your new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices and often lower fees.

If you choose a roll over, request a direct rollover from your old plan to your new plan or IRA.  If, instead, the funds are sent to you by check, you’ll need to make an indirect rollover (that is, deposit the funds into an IRA) within 60 days to avoid tax and potential penalties.

Also, be aware that the check you receive from your old plan will, unless an exception applies, be net of 20% federal income tax withholding. If you don’t roll over the gross amount (making up for the withheld amount with other funds), then you’ll be subject to income tax — and potentially the 10% penalty — on the difference.

There are additional issues to consider when deciding what to do with your old retirement plan. We can help you make an informed decision — and avoid potential tax traps.

If you are changing jobs and need advice on your options for your old retirement plan, contact me at HZemel@BerdonLLP.com or your Berdon advisor.

Hal Zemel, a Tax Principal at Berdon LLP, New York Accountants, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.

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