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Your Money's Worth

May 18, 2008
By Steven J. Bailey, CFP, CLU, ChFC
If you decide to change jobs, lose your job, or your company is bought out by another company you may have to decide what you want to do with your employer sponsored retirement plan (i.e. 401(k), SEP, ESOP, or profit sharing plan).

This can be a very difficult decision for you to make and requires careful planning.

When making this decision you must understand all of your options and then make an informed decision on what is best for you because this is the money that you will use during your retirement.

There are a couple different options that you have when deciding on what to do with your retirement plan. You can liquidate the plan and take the cash, you can leave it with your ex-employer, you can roll it into you new employers plan, you can roll it into an existing IRA that you have or you can open a new IRA and roll it into it.

4 Liquidate the Plan: You can fill out a form and have your ex-company liquidate your share of the plan and send you a check.

If you are 59 or younger you will be charged a 10 per cent penalty for early distribution, the entire distribution will count as income to you, and you will have to pay income taxes on this money. For example: If you take a $25,000 distribution from your retirement plan you may have to pay between 20-40 per cent in taxes and penalties (depending on your income tax bracket).

4 Leave your Plan: Some employers will allow you to leave your retirement invested with them whereas other employers require you to take it out by a certain date. Some disadvantages of leaving your retirement plan with your ex-employer is that you must invest in whatever the company offers, if the company decides to change investment companies you must also change investment companies, and you will no longer be able to contribute to the plan.

4 Roll it Over to a New Plan: If you have started a new job you may be able to rollover your retirement plan from your last employer into your new employer’s retirement plan.

You would be able to accomplish this thru a direct rollover between investment companies and you would not be charged any early withdrawal penalties or have to pay taxes on the rollover.

A disadvantage of rolling over your old retirement plan to your new employer is that you are limited to the investments that your new employer has to offer and you may not be able to roll this money out until you are no longer employed by your new employer.

4 Roll it Over to an Existing IRA: If you already have an existing IRA account that is registered in your name you may be able to rollover your retirement plan to this account. You would be able to accomplish this thru a direct rollover between investment companies and you would not be charged any early withdrawal penalties or have to pay taxes on the rollover. This would be a good option if you were satisfied with the performance of this account. If you choose this option, you need to make sure that the rollover is done properly so that you do not have to pay any taxes or penalties.

4 Roll it Over to a new IRA: If you do not have an existing IRA or you do not want to rollover your old plan to your existing IRA, you can open up a new IRA and rollover the money into it.

By opening up a new IRA you will be able to choose what type of investments you want your retirement plan invested in and how you want it diversified.

You will also be able to make changes to this account whenever you want to since it is in your name and it is not being offered thru an employer.

Whatever you decide to do with your retirement plan when changing jobs or plans is up to you, but remember that this is your money and you should have it invested to meet your goals for retirement.

To meet your goals you will need to make informed decisions on what is best for you, understand what you are doing, make sure that you are diversified, and continue to monitor and change your investments to meet your own personal situation (what other people are doing may not be to the best of your interest because everyone’s financial picture and goals are different).

If you are not sure which option is best for you, do not know how to diversify your investments, or do not have the time to monitor your investments, it may be to your best interest to seek the help of a certified financial planner.

Steven J. Bailey CFP, CLU, ChFC is a registered representative of American Portfolios Financial Services, Inc. Member FINRA/SIPC, Advisory Services offered through American Portfolios Advisors, Inc., located at 992 E. State St. Salem and can be reached at 330-337-7720 or if you should have any further questions regarding this matter.


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