First Job Change
I have a good job and seem to be doing well. However, the job has gotten a little boring and I want to make more money. I have decided that I am going to change jobs and want to be sure that I handle everything properly, especially as it relates to getting my money from my existing retirement plan.
You are smart to consider how to handle your anticipated distribution from your existing employer's retirement plan. The decisions you must make can make a big difference in your long term finances.
If you have participated in a company retirement plan like a 401(k) plan and change jobs, you will probably receive a distribution of the funds you have accumulated in your plan. The distributions are often called lump sum distributions. If you have participated for several years, the distribution could be quite substantial. Over the course of your working career, you may receive several lump sum distributions and what you do with those funds and how you handle the distribution is important.
While you may be tempted to just take the money and spend it, remember that there would be income taxes and probably an additional tax penalty. After all, the funds are for your retirement. By avoiding that temptation you have the opportunity to build your wealth and take a large step forward on your path to a financially secure retirement.
Reviewing Your Options for a Retirement Plan Distribution
If you have been a participant in a plan for a long time and have accumulated a large sum of money, these decisions can have a very large impact on your financial future and that of your family. Considering the decisions carefully is critical. Be sure you fully understand your options and get professional help if you need it.
Pay taxes or not
Unless you absolutely need the money immediately, it is usually advisable to maintain the tax deferral status. When you receive the distribution check and if you plan to move it into an IRA or your new employer's plan, make sure you do that quickly. If you do not get it deposited within 60 days, you will owe tax on it and a 10% penalty.
Where to keep your funds
Even if you are currently unsure of your long-term plans, you may want to have the funds transferred into an IRA. You can always make withdrawals later if you choose.
Investing your funds
Be sure to consider your time horizon and risk tolerance when making your investment decisions. If you transfer your distribution to your new employer's retirement plan, consider the investment options and choose appropriately. If you go the self-directed IRA route, most institutions offer accounts that enable you to choose stocks, bonds, mutual funds, money market funds and other investments.
Don't feel that you have to make all the investment decisions immediately. As long as the funds are within another qualified plan or IRA, there should be no taxes due and you can make informed and careful investment choices.