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Protect Retirement Savings When Leaving a Job
By Vivian Marino  Associated Press
NEW YORK — Millions of workers will leave their jobs this year through career moves, layoffs or retirement, and many of them will face an important decision about what to do with their retirement nest eggs.

Should those savings fly the coop, too?

Several options are available for those participating in employer-sponsored retirement plans like the 401(k): They can stay invested with their former employer; transfer to a new employer's plan; roll it over into an Individual Retirement Account; or take a lump sum.

Many people aren't aware of these options and their tax consequences, so the most common move has been to take the money and run, which can be a costly strategy.

A study released in 1997 by the Employee Benefits Research Institute found that 60 percent of job changers took cash payments from their tax-deferred 401(k)s. Only 7 percent rolled the payouts into another plan; 33 percent into an IRA.

"So many people just take the cash and spend it not realizing the tax ramifications of it," said Ed Slott, a Rockville Centre, N.Y., accountant who publishes a monthly retirement benefits newsletter. "They're probably only going to keep 60 percent of it (after taxes), but they're spending 100 percent of it."

Lump sum distributions are subject to at least a 20 percent withholding for federal taxes, plus those younger than 59 1/2, may owe an additional 10 percent penalty tax for early withdrawal. Rollovers, on the other hand, are tax free as long as the money is transferred to a tax-deferred account like another 401(k) or IRA.

There are other tax traps to watch out for.

Those who opt to roll over their retirement savings into an IRA must keep a watchful eye on the calendar. Individuals with 401(k) withdrawal in hand have 60 days to deposit the entire check into another qualified tax-sheltered account or face tax penalties.

And those planning to temporarily park their funds in an IRA before transferring them into a new 401(k) must be careful how they handle this transaction.

"It has to be a brand new IRA, not an existing IRA ... or it can't be done," Slott said.

He noted that individuals can't make additional contributions to this conduit account because it will be considered "tainted," and therefore, can't be transferred to a new 401(k).

Also, those who want to roll their 401(k) money into a new tax-free Roth IRA must first transfer their funds into a new traditional IRA, then convert some or all of it to the Roth. They'll have to pay an upfront conversion tax.

Robert B. Wolfe, a financial adviser from Wilmington, Del., urges individuals to contact the benefits departments of both their old and new companies before making any decisions since each employer's policy may differ.

Some employers will let former employees remain in their plan, while others won't; some employers require new employees to work for a certain length of time before participating in their 401(k), while other's don't.

"The (former) company may give you between 60 days and up to one year after you leave to reinvest ... . If you choose not to reinvest, you may have to wait until you are 65 years old to get access to your retirement money," Wolfe noted in his January investor newsletter.

"Other companies let you obtain your distribution at any time once you terminate employment."

The advantage of staying put in a former employer's plan is that taxes and penalties are avoided while earnings continue to grow tax-deferred. But investment options may be limited, especially when compared with those available in an IRA.

Slott advises against sticking with a former employer's 401(k).

"I find that ex-employers are not that concerned about ex-employees," he said.

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