Volume 4 Issue 2006

When today's typical 25-year-olds reach age 65, they will have worked, on average, for seven or more employers.* All that job changing will mean that workers who participate in their employers' retirement plans may face this important decision several times: Should they pocket their savings when they leave or keep the money growing tax deferred?

Several Options
When plan participants terminate employment (willingly or otherwise), they are typically entitled to a distribution of the vested portion of their retirement plan account. The employee can take the distribution in cash, request that the funds be transferred to another employer's plan or an individual retirement account (IRA), or leave the money where it is (if the current employer's plan permits).

Take It? They'll Tax It
The government encourages people to keep their retirement savings in tax-deferred accounts when they change jobs. Recent changes in the tax law make it easier for workers to move their retirement savings from one type of plan to another.

Conversely, early distributions are discouraged: the tax law imposes a 10% penalty on distributions taken before age 59½ (some exceptions apply).  The penalty is payable in addition to income tax, further reducing the amount available to the employee.

Example: Jane is 36 years old and is changing jobs.  She's planning to take the $15,000 in her retirement account to pay off some large bills.  Here's what she'll have after paying the IRS:

Rollover Rewards
If Jane rolls over her $15,000 balance instead, and earns an average annual total return of 7%, this is what she might find:

If you're eligible for a distribution from your retirement plan, think twice before you spend it.

* Congressional Research Service Report, “Pension Issues: Lump-sum Distributions and Retirement Income Security,” 8/5/2005.