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Leaving your job?

Spring is a season for change and many people are in the process of changing jobs or perhaps even retiring. There are many challenges to face with these changes not the least of which involves the decision of what to do with the retirement funds that have accumulated in your 401(K), or other retirement plans, over the years of service with your employer. These decisions may have a significant impact on your future financial security in retirement. The following options may help you in deciding what to do with your accounts.No. 1 – Take the money! You can choose to take your retirement money right away. This may look like a good idea, but selecting this option could be your biggest mistake. First, your employer is required to withhold 20 percent from your lump sum distribution, so you will only receive 80 percent of the amount you are entitled to. Second, if you are younger than 59 1/2, you may b e subject to a 10% penalty additional federal income tax penalty for early withdrawal. Third, you are liable for paying taxes on the full amount – if you fail to rollover your funds into an IRA within 60 days. Moreover, the money you spend now could have gone on earning tax-free returns toward your retirement. Which would rather have a check now or a more comfortable retirement? Bottom line – this option is most often the least desirable choice.No. 2 – Leave the money with your old employer. If you have more than $5000 in your former employer’s retirement plan, you can usually leave the money where it is. (Check with your employer.) The advantage to doing this is that is postpones making a decision while maintaining the tax-deferred status of your assets. The downside is that you are limited to the investment choices offered by your ex-employer – or even fewer choices, since some companies have additional restrictions for non-active employees. Additional disadvantages include service fees and the inability to contribute to your account. Bottom line – this may make sense in the short term but better alternatives usually exist.No. 3 – Move your retirement to your new employer. This option works if you are moving to another job. Even then, your new employer may not accept rollovers from a previous plan or may impose a waiting period. The investment options offered by your new employer may not be as extensive as you want. The benefit is that you maintain your assets’ tax deferred growth potential and benefit from the convenience of having your assets in one place. Bottom line – This can work for some but you should investigate the new plan first.No. 4 – Put the money into a traditional IRA rollover. For most people this option makes the most sense. By having your former employer’s retirement plan send the money as a direct rollover, you avoid the 20 percent withholding or any penalties. There are numerous benefits to your own IRA rollover including – – A wide choice of investment opportunities – you can select the stocks, bonds, mutual funds or other investments that are right for you.- The ability to consolidate retirement accounts. If you’ve had several jobs, you may have several retirement plan accounts with different former employers. Putting them all together into one IRA rollover makes managing them much more efficient. Recent federal tax rule changes now allow IRA owners to add new contributions to their IRA rollover without impacting the ability to roll these assets into an employer’s plan in the future.- The ability to withdraw without penalty for some purposes. Even though all traditional IRA withdrawals are presumed taxable as ordinary income, the additional 10 percent penalty for early withdrawal can be avoided if the money in an IRA rollover is used for certain items, such as some medical costs, higher education or the down payment on a first home. (There are restrictions on these uses, contact your tax adviser.) In addition, withdrawals can be made without penalty by taking a series of substantially equal periodic payments for at least five years or until after your reach 59 1/2. If you are planning to retire before you reach 59 1/2, this method can enable you to access your IRA without penalty. Bottom line – You can avoid a lot of confusion and maintain the tax-deferred status of your funds by rolling over your former employer’s plan directly into an IRA. Contact your financial professional to explore the details and determine if an IRA Rollover is right for you.Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors LLC (member NASD, SIPC), 1290 Avenue of the Americas, New York, NY 212-314-4600. They can be reached locally at 926-6911 or tracy.tutag@axa-advisors.com.Vail, Colorado


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