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A Rollover Primer Part 1: Age 55 and Under

If you’ve changed jobs recently (or expect to soon) because of a layoff or a corporate downsizing, or perhaps on the brighter side because of retirement, you face an important decision regarding money in your former employer’s retirement plan: whether to leave it there, or to withdraw it now, or to roll it into another tax-preferred place like an IRA. You might have money in your former employer’s 401k plan (typically in the traditional business world), a pension plan (offered by businesses and government entities), a 403b plan (typically offered by non-profit organizations and government entities) or maybe a 457b plan (offered by government employers). Your distribution choices are limited, depending on your age, so we’ll use age as a guideline.

Age 55 and Under. If you’re in this age category, rolling your retirment plan money to an IRA is usually a very good strategy. By rolling to an IRA, you preserve the tax status of your retirement plan money. Translation: you don’t owe any income tax now on that money, nor are you potentially subject to a 10% early withdrawal penalty because you’re under 59 1/2. The smoothest mechanism to accomplish this rollover is called a “direct rollover.” Your retirement plan money goes directly from your old employer to your rollover IRA; no taxes, no penalty, and no tax reporting required. No muss, no fuss. You fill out a rollover IRA application and submit it to your old employer or to the financial firm that will hold your rollover (always best to check with your old employer’s HR department to verify the best way to complete the process).

Are there advantages though, to possibly leaving your money back in your old employer’s retirement plan? Maybe, but you’ll usually have more investment options, more investment control (when and how often you can make changes to your investment mix), and more beneficiary options with a rollover IRA. Not to mention if your old employer gets into serious financial trouble, you’ll avoid a lot of headache and worry knowing your retirement money is safely tucked away in your rollover IRA with your financial firm.

Next time, we’ll look at distribution and rollover options for folks age 55 to 59 1/2, to see which choices can help maximize your retirement readiness.

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