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Think Twice About Spending Your Savings
When today's typical 25-year-olds reach age 65, they will
have worked, on average, for seven or more employers.* All
that job changing will mean that workers who participate in
their employers' retirement plans may face this important
decision several times.
Should they pocket their savings when they leave or keep the
money growing tax deferred?
Several Options
When plan participants terminate employment (willingly or
otherwise), they are typically entitled to a distribution
of the vested portion of their retirement plan account. The
employee can take the distribution in cash, request that the
funds be transferred to another employer's plan or an individual
retirement account (IRA), or leave the money where it is (if
the current employer's plan permits).
Take It? They'll Tax It
The government encourages people to keep their retirement
savings in tax-deferred accounts when they change jobs. Recent
changes in the tax law make it easier for workers to move
their retirement savings from one type of plan to another.
Conversely, early distributions are discouraged: The tax law
imposes a 10% penalty on distributions taken before age 59'/2.
(Some exceptions apply.) The penalty is payable in addition
to income tax, further reducing the amount available to the
employee.
Example: Jane is 36 years old
and is changing jobs. She's planning to take the $15,000
in her retirement account to pay off some large bills.
Here's what she'll have after paying the IRS:
Jane's vested plan balance $15,000 Income tax (marginal
rate = 15%) -2,250 10% penalty tax -1.500 Jane's net payout
$11,250 |
Rollover Rewards
If Jane rolls over her $15,000 balance instead, and earns
an average annual total return of 7%, this is what she might
find:
Jane's
rollover
amount: |
Balance in
5 years |
Balance in
10 years |
Balance in
20 years |
Balance in
30 years |
| $15,000 |
$21,038 |
$29,507 |
$58,045 |
$114,184 |
If you're eligible for a distribution from your retirement
plan, think twice before you spend it.*
*Congressional Research Service Report, "Pension Issues:
Lump-sum Distributions and Retirement Income Security,"
8/5/2005.
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