Keep retirement investments working when you change jobs

In today's world of corporate mergers, takeovers and downsizing, changing jobs is a fact of life. Regardless of the circumstances, you'll have some decisions to make about your retirement investments when you leave one employer for another — or take time out of the workforce while you're looking for a new job.

If you have less than $5,000 in your retirement account:

Your employer may close out your account. Since you don't want to pay income tax — and perhaps an additional early withdrawal tax penalty — direct your employer to roll the money over directly to your new employer's retirement account, if that is an option, or to an IRA that you open at a financial company of your own choosing. If you choose an IRA, you'll have to open your account first, then provide the account information to your previous employer so that the money can be transferred directly.

Whichever of these two options you choose, make sure that the transfer is made directly to your account. If your employer writes a check in your name, 20% of your account balance will be withheld against a potential tax bill.

For example:
If you have $4,000 in your account, but your employer writes a check in your name, the check you receive will only be for $3,200

If you deposit the money in your IRA, you'll have 60 days to roll it over, so you'll have to make up the $800 difference on your own. You won't get the money back that your employer withheld until tax time. Or, you can deposit only $3,200 and pay tax — and perhaps a 10% early withdrawal penalty — on the $800 that never made it to your new account.

If you have more than $5,000 in your account... you may have four options:

You can roll the money over to your new employer's plan, if this option is available.
Or you can roll it over to an IRA that you open at a financial institution of your choosing. Rolling your investments over to an IRA is one way to maintain full control over your money. Often it provides a wider range of investment options. And if you change jobs multiple times, it's an easy way to accumulate your investments in a single, consolidated account.
Usually, you can leave the money in your former employer's plan until age 65 — and in some cases, even longer. This may make sense if your employer offers access to investment options that you can't get from your new employer's plan — or on your own. And, it's easy. You just walk away and your money continues to enjoy tax-deferred growth potential. Your employer will send quarterly or annual statements allowing you to track your holdings. You may also be able to track your progress online.
You can withdraw the money, pay income tax and possibly an early withdrawal penalty (unless you are 59 ½ or 55 and severed from employment by your employer). This should be a choice of last resort. You'll give up all future tax-deferred growth potential and short change your future retirement.

There's no one right choice, but any future tax-deferred growth potential will be lost if you don't keep your retirement investments working for you when you change jobs.

AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.

The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.

While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is an investment adviser and a subsidiary of AARP.