To Roll or Not to Roll: It’s Your Choice

It used to be common for employers to encourage (or require) departing employees to withdraw their money from the company’s retirement plan.1 Like most employee benefits, an employer-sponsored retirement plan is typically an expense for the employer.

Now that the baby-boom generation has started reaching retirement age (at the rate of about 10,000 per day), some employers are encouraging departing employees to leave their retirement savings in the company plan.2–3 These employers are finding that the loss of large employee accounts can diminish their leverage when negotiating with plan administrators, possibly making their retirement plans less attractive to current and prospective workers.4

If and when you leave your current job, either to retire or to take a new position, understanding the options for your retirement savings may help you make decisions that serve your interests and not those of a former employer.

Stay Versus Roll

Employees are under no obligation to leave money invested in a former employer’s retirement plan but are free to roll it over to a traditional IRA. A properly executed IRA rollover can help preserve the tax-deferred status of retirement assets and avoid unwanted tax consequences and penalties. However, there are some subtle differences between IRAs and employer plans to be aware of before you decide how to proceed.

Investment options

The investment options in an employer plan tend to be limited by the plan administrator. The investment options available in IRAs are nearly unlimited.

Early withdrawals

If you think you might tap your retirement assets early, you may want to leave them in the employer plan. Normally, a 10% federal income tax penalty applies to distributions from traditional IRAs and employer retirement plans before age 59½. However, you may be able to avoid this penalty with an employer plan if you sever employment during or after the year in which you turn 55. [The age 55 exception does not apply to IRAs, annuity contracts, or modified endowment contracts (MECs), nor does an exception for death apply to MECs.]

You may also be able to withdraw money from a former employer’s plan or an IRA and avoid the early-withdrawal penalty by taking a series of substantially equal periodic payments (based on life expectancy) that continue for at least five years or until age 59½, whichever occurs later.

Early withdrawals may be penalty-free in the event of death or disability. IRA exceptions to the penalty also include a first-time home purchase ($10,000 lifetime maximum), unreimbursed medical expenses that exceed 7.5% of adjusted gross income, and qualifying higher-education expenses. Withdrawals from traditional IRAs and employer-sponsored retirement plans are subject to ordinary income tax.

Keeping track of multiple accounts

Over the course of your career, you could accumulate several retirement accounts. Rolling them all into a single IRA may give you a better perspective of your retirement portfolio and help reduce the potential for losing track of your money.

Creditor protections

Employer plans have strong creditor protections enshrined in federal law. Money rolled into an IRA from an employer plan typically enjoys the same protections.

There is no one-size-fits-all solution. A careful evaluation of your circumstances could help you decide what to do with your retirement assets when you change jobs or retire.

Financial Securities Services, LLC, Summit Brokerage Services, Inc., Summit Financial Services, Inc. and its affiliates do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation.