Making Your Retirement Stream Last

Moving from Your Company's Retirement Plan Before You Retire

When you leave your job, you may have several choices regarding your company's retirement plan savings:

  • leave the money where it is
  • roll it over to a traditional IRA or your new company plan
  • take it as a lump-sum distribution to spend or invest

If you're happy where it is and the company permits, leave it there. If you want more investment flexibility and control, roll it over to an IRA. If you like the choices that your new employer's plan offers, move it there.

SUGGESTION: If you are eligible to establish a Roth IRA, consider rolling your company retirement plan savings into a traditional IRA, then convert it to a Roth IRA.

Avoid taking a retirement plan distribution before retirement. Using your retirement plan savings for non-retirement purposes should always be your last resort unless, of course, you have a personal emergency.

Remember, you may have borrowing options in your 401(k) plan. If you feel more comfortable knowing you can borrow the money, should you need it, transfer it to your new employer's plan. If you leave the money in your old employer's plan, you probably won't be able to borrow the funds. If you move it into an IRA, you no longer have the privilege of borrowing your money. You'll have to withdraw it—and pay taxes and a possible penalty.

If you are in-between jobs, you may roll your distribution over into a conduit IRA. If you commingle it with an existing IRA, in which qualified plan assets have not been segregated, capital gain and averaging tax treatment (for individuals born before 1936) will not be available.

When you leave an employer, you generally receive a termination package in which you can elect a distribution option. If you're going to be moving your funds, instruct your previous employer where to send your distribution. Your new employer or an IRA institution can provide you with the name and address of the new custodian.

Protect Your Retirement Assets

One last word when leaving a job, particularly if you've been laid off; you may be tempted to use the money for day-to-day living expenses. Exhaust every other possibility before you withdraw your money. Between income taxes and a possible penalty tax, you will pay a tremendous price in both the short- and long-term if you invade your retirement account. Here's why:

Suppose you are 40 years old, you are in the 25% tax bracket, and you need $10,000. You have no other savings. You decide to withdraw $10,000 from your company retirement plan. You'll have to withdraw another $5,385, a total of $15,385 just to net $10,000. Why so much? The government requires you to pay income tax as well as a 10% penalty (assuming you're under age 59½). See the section Early Withdrawals for information about exceptions to the 10% penalty.

How Much Will You Actually Have to Borrow to Net $10,000?

Withdrawal amount


minus income tax at 25%

$ 3,846

minus 10% penalty if under age 59½

$ 1,539



Since you are required to pay income tax and penalty tax, it is actually costing you 54% more. That's the short-term effect of taking the withdrawal.


The long-term effect—assuming a 7% tax-deferred return and you don't retire until age 65—is that the $15,385 could have grown to $83,501 in 25 years.

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