What to Do With Money in a Retirement Plan When Leaving a Job
When you leave your employer for another job or because you are planning to retire, you need to make choices about your retirement plan assets. Because the retirement plan represents one of the largest savings amounts for many people, the choices can make a difference for your financial future. Often, your choices depend on the type of retirement plan you own.
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Defined Contribution Plans
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A defined contribution plan is one in which you contribute a portion of your salary. A 401k plan is an example of a defined contribution plan. Your company may contribute a matching dollar amount or a profit-sharing contribution. Typically, you have three options with this type of plan when leaving your employment. You can cash it out, taking a lump sum distribution. However, with this option, you must pay income taxes on the entire value of the account for the tax year of the distribution. In addition, you may pay an additional 10 percent penalty if you are younger than age 59½. The other options are to rollover your contributions to an IRA or to another company's retirement plan. Check with your plan administrator to learn your rollover options and to find out whether you have worked for the firm long enough to rollover your employer's contributions to your new account.
Defined Benefit Pension Plan
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A traditional defined benefit plan pays you a monthly pension benefit when you reach retirement age. Traditional pension values are determined by your ending salary, your age and your years of service. In most cases, you must leave this plan with your employer until you reach the age at which you can begin income payments. Be sure to keep your address and contact information updated with your plan administrator. If your former employer comes under new ownership, make sure the new owners have your contact information so you can be informed of plan updates and eligibility options.
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Defined Benefit Cash Balance Plan
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Some pension plans function as though you own a portion of the total cash balance in the plan. In this case, you may need to choose between a rollover option and leaving your account balance with your employer until you can begin income benefits. According to CNN Money, cash balance plans typically are based on the yield of a 30-year Treasury bond. Younger workers probably could earn more than the average yield on the bond, so they may consider a rollover to an IRA if they believe they can generate greater earnings. If, however, you are close to retirement, you may not be able to earn enough on a rollover to justify giving up your monthly pension benefit. Check with your plan administrator for benefit options and estimates. Also, consider the financial strength of your employer. If it appears the firm may terminate the plan or file for bankruptcy, you may consider a rollover to an IRA.
Investment Options
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How you invest your retirement funds depends on your age, your need for growth or income, your time horizon and your tolerance for risk. Generally, you can find investments similar to your plan's current investments. You can choose from certificates of deposit (CDs), money market accounts, stocks, bonds or mutual funds. You might talk with a financial adviser to help you understand your options.
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