Nobody wants to leave money behind. When you leave an employer, whether to move to another job or for retirement, you may have funds in a retirement plan. There are several options for taking that money with you based on the type of plan the money is invested in and your age.
Defined Benefit Plan
A defined benefit plan is a retirement plan where the employer makes the contributions. The plan rules determine whether or not you can take the money with you. For instance, you may need to be vested -- work a minimum number of years with the company -- before any of the money is considered yours. Once you are vested, the plan may have an option for you to take the money with you, or you may need to leave the money with the employer until you reach plan retirement age. Check for plan details with your company’s Human Resources department.
Defined Contribution Plan
A defined contribution plan is one where you have made the contributions. Since you made the contributions, the money is always 100 percent yours. Some defined contribution plans have an employer match where the employer makes a contribution based on the employee’s contribution. You may need to be vested for ownership of the match funds. When you leave a job, you may take your money out of the retirement account, but there could be penalties and tax consequences you should be aware of before making that decision.
Option: Cash it Out
You can cash out the retirement account. This qualifies, as defined by the IRS, as a distribution. All distributions taken from a traditional retirement fund are considered taxable income, and you will pay taxes on the money you withdraw. Additionally, if you are younger than 59 1/2, you will pay a 10 percent penalty for withdrawing the money early.
Option: Transfer to New Employer
The possibility exists to transfer the money to your new employer’s defined contribution plan. Not all plans allow this. Even if you are allowed to do this, you should check what investment options are in the plan and whether the plan versus the employee pays the plan fees.
You can rollover the money into your own personal IRA at any number of financial institutions. Unless you need the money now, this is usually the smartest financial move. The money continues growing tax-deferred, and you now have available a wide range of financial vehicles as compared to a typically smaller number in a company plan. Additionally, you won’t pay any taxes on it now. If this is the option you choose, be sure to arrange the rollover directly to your new account. Select the financial institution you want to work with, open the account and ask them to arrange the direct rollover.