Do you have multiple retirement plans?

Each year, over 20 million people in the United States change jobs due to mergers, downsizing, and layoffs, as well as voluntary career changes, and millions more enter retirement. Whether you have recently retired or changed careers you may have one or several retirement plans at former employers, and because of the array of options you have, many individuals are inclined to not make a decision at all and leave the money in their former employers’ plans.

When you change jobs, are displaced, or retire, you have several options available to you for your retirement assets:

• Roll them into an IRA

• Take a cash distribution

• Leave the assets in the plan

• Move them into your new employer’s plan

Each option has its advantages disadvantages, and this will help you to understand your options.

Rolling them into an IRA

There are many advantages to rolling your former employers plan into an IRA:

• It is simple to do and avoids the 20% withholding for the IRS.

• Your assets retain their tax-advantaged growth potential.

• IRA’s can conveniently be maintained with one custodian.

• A Traditional IRA may be able to be converted to a Roth IRA for potentially greater tax benefits. Be sure to check with your tax professional about the rules and regulations with a Roth IRA conversion.

Some things to watch out for when you rollover you retirement plan into an IRA: withdrawals before age 59½ may be subject to a 10 percent IRS penalty; also, Required Minimum Distributions must be taken from Traditional IRA’s by April 1st following the year you reach 70½.

While this option may sound attractive at first, there are some serious consequences to consider:

• You’ll owe income taxes on the amount you receive.

• Generally, the IRS may assess a 10 percent penalty if you’re younger than the age of 55 when you receive distributions.

• Your funds lose their tax-advantaged growth potential.

• Your former employer is required to withhold 20 percent for the IRS.

According to one study, more than 45 percent of the individuals who decide to move their retirement plan assets cash out their retirement funds and pay unnecessary income taxes. However, the advantages are that you can use the assets however you wish, including retirement, and certain IRS guidelines do offer penalty-free distributions. Check with your local tax professional or trusted financial advisor for more details.

Leaving your retirement assets behind may create complexities in managing your investments and could affect your income options as you approach retirement. Some of the advantages are:

• It requires no action on your part.       

• Assets retain their tax-advantaged growth potential.

• Your assets are usually protected from creditors’ claims under the Employee Retirement Income Security Act (ERISA).

Some things to keep in mind are that if you change jobs several times it can create complexities, such as calculating Required Minimum Distributions from multiple accounts. Your relationship with your former employer must be maintained, possibly for many years to come. Additionally, the plan may limit your investment alternatives and may not provide needed flexibility. If you fail to take the Required Minimum Distribution it can result in substantial IRS penalties.

If you are changing careers, you may able to move your retirement savings into your new employer’s plan. Some things to keep in mind:

• You can transfer or roll over only plan assets that your new employers plan permits.     

• You may not receive the same retirement benefits your former employer’s plan provided.

• The new plan may limit investment alternatives and may not provide needed flexibility.

• Your new employer will control when and how you access savings.

Rolling over your assets from your former employer to a new employer’s plan will allow your assets to retain their tax-advantaged growth potential, and your assets are usually protected from creditors’ claims.

As you can see, there are several options to consider when you are changing jobs or retiring. You can always find additional information from your former employer; you can contact the IRS, or speak with your trusted advisor. There is no one option that fits everyone’s needs, so be sure to seriously consider your options and make sure you are making the best choice for you and your family's particular needs.

Mark Zagrocki is a Chartered Retirement Planning Counselor and Financial Advisor in Westlake.

Wells Fargo Advisors does not provide legal or tax advice. Please consult your own tax and legal advisors before taking any action that may have tax consequences. Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUEWells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.1U.S. Bureau of Labor Statistics, 2/092 Hewitt & Associates, 7/05