Leaving Your Current Job? You Have Retirement Plan Options – Part 2

By Marvin Rotenberg, IRA Technical Expert

This is the final part of a two-part article examining six options individuals have for their retirement plan benefits when they leave an employer or become their own boss. In the first part, we covered three options (rolling over to a Traditional IRA, taking a lump sum distribution, leaving it in the plan). We finish our guide with the last three options and provide some closing words of wisdom when considering which choice is best for you.


Roll To a New Company Plan
 If you are changing employers you may have an opportunity to participate in your new company’s retirement plan. Many permit you to rollover assets from a former employer’s plan, which would allow you to keep all of your company-sponsored retirement funds in one place. Also, you would retain the benefits afforded qualified plan participants, such as enhanced protection against creditors, potential to purchase life insurance in the plan, or retain the insurance policies you had purchased previously in your former employer’s plan. However, the first step is to check the new company’s plan document to determine if you will be allowed to rollover assets from another company’s plan.
Of course, keeping your money inside a company plan subjects you to the rules established by the employer for investing as well as naming beneficiaries. Also, distribution options may be limited for both you and your beneficiaries, but most plans typically have liberal withdrawal rules when it comes to this type of money.

Convert to a Roth IRA
Under the old rules, in order to convert from a corporate plan to a Roth IRA you would have had to first put the funds into a Traditional IRA and then convert to a Roth IRA. Now, you can go directly from a qualified plan into a Roth IRA without an intermediate step.

We have discussed the virtues of Roth IRAs on many previous occasions. If you are considering converting to a Roth IRA make sure you have outside liquidity to pay the income tax. If you have to use some of the company plan money to pay the tax it generally does not make good financial sense and could subject you to an early distribution penalty if you don’t otherwise qualify for an exception (e.g. separation from your employer in or after the year you attain age 55.)

Converting to a Roth Account Offered by the Employer
If your employer plan has adopted a Roth option within their 401(k), 403(b), or governmental 457(b) plan and if the plan allows, you may be able to transfer funds that you would otherwise be able to withdraw into the Roth account in the plan. If you are transferring taxable amounts to the Roth 401(k), you will have to pay income tax on the taxable amount. The conversion to a Roth account inside the employer plan is an irrevocable transaction. There is no recharacterization allowed. You must be sure you have the funds to pay the income tax due on the conversion.

We didn’t discuss 403(b) plans in particular, but we should mention a special provision that allows 403(b) participants who have account balances prior to 1987 to defer RMDs (required minimum distributions) on those amounts until age 75, provided records are available to identify such balances. The remaining 403(b) account balance (post 1986 money) must still follow the regular age 70 ½ distribution rules. If, however, the 403(b) money is transferred to an IRA this provision does not apply.

Finally, whether you leave a company for a new job or retire to a life of leisure, you have an important decision to make regarding your company retirement savings. The options are many and the rules are complex, so you should consult with an advisor who is very knowledgeable in this area. It will be money and time well spent for both you and your heirs.

-By Marvin Rotenberg and Jared Trexler


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