Changing jobs or retiring? Do not forget your retirement savings!

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Your retirement savings plan offers you several choices for managing the money that has accumulated in your account when you decide to change jobs or retire. This may include amounts you have contributed, the vested portion of any amounts your employer has contributed, plus any earnings on those contributions.
You will want to think carefully before making any decisions about withdrawing the money in your retirement plan, as some choices may entail greater tax liability than others.

A look at some of your choices

Generally, you have three options for managing the money in your employer's retirement plan when you change jobs or retire:
1. Keep Your Money in the Plan:
  • Generally available if your account balance was more than $5,000 when you terminated employment
  • Continue to enjoy tax-deferred compounding of any investment earnings
  • Continue to receive regular account statements and performance reports
  • While new contributions are not allowed, you typically still have control over how your money is invested among the plan's investment options
  • Minimum distributions must begin by April 1 of the calendar year following the year in which you attain age 70½Footnote 1
If you are retiring, you might choose this option if your spouse is still working or if you have other sources of retirement income. If you're starting your own business when you leave your current job, keeping your retirement money in your former company's plan may help protect your retirement assets from creditors, should your new venture run into unforeseen trouble.
2. Move Your Money to Another Retirement Account:
  • You can move your money into another qualified retirement account, such as an IRA, or, if you're changing jobs, your new employer's retirement savings plan
  • With a "direct rollover," the money goes directly from your former employer's retirement plan to the IRA or new employer's retirement savings plan, and you never touch your money. With this method, you continue to defer taxes on the full amount of your plan savings.Footnote 2
3. Take a Cash Distribution:
  • Have your money paid to you in one lump sum, or in installments of a fixed amount or over a set number of years, depending on your plan's provisions
  • Choosing to take part or all of your money when you retire or change jobs is considered a cash distribution, which is subject a mandatory tax withholding of 20%
  • Individuals under age 59½ (55 in some circumstances) could also be liable for a 10% additional federal tax on early withdrawal, in addition to any state taxes
To avoid paying taxes and potentially incurring early withdrawal additional taxes on a cash distribution consider redepositing your money within 60 days to an IRA or your new employer's qualified plan (an "indirect rollover"). In this case you'd have to make up the 20% federal income tax withholding from your own pocket, but any excess federal income taxes withheld would be refunded when you file your regular income tax return.
The potential cost of a cash distribution
– 20% Tax WithholdingFootnote 3
= Cash Amount Before Any Actual Taxes
– $2,000

Retirees should consider potential tax consequences

  • If you're retiring, and opt for the lump-sum option, you will want to determine if there are any favorable tax rules that apply to your distribution, such as the minimum distribution allowance or 10-year forward income averaging if you were born before January 2, 1936
  • To qualify as a lump-sum distribution, you must receive all the money in all of your retirement plans with a company (including 401(k), profit sharing, and stock purchase plans) within a one-year period
There may be other distribution options available. Contact your plan administrator for information on all options available under your plan. Then be sure to consult a qualified legal and/or tax advisor to ensure that your planning decisions coincide with your financial goals.

Footnote 1 If you retire in any year after the year in which you attain age 70½, then you must take minimum distributions by April 1 of the calendar year following the year in which you retire.

Footnote 2 Fees and investment expenses may be higher in an IRA than in an employer-sponsored plan. Rolling over employer stock from a retirement plan to an IRA results in the inability to utilize the net unrealized appreciation strategy. Also, if you plan to work past age 70½, an employer-sponsored plan may allow you to delay required minimum distributions until April 1 of the calendar year following the year in which you retire.

Footnote 3 The tax rate applied to the distribution would be your actual marginal income tax rate plus any additional federal taxes. State taxes may also be due.

You have choices for what to do with your employer-sponsored retirement plan accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over your eligible savings to an IRA or convert to a Roth IRA, roll over your account in an employer-sponsored plan from a prior employer to an employer-sponsored plan at your new employer, take a distribution or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions and tax treatment, and may provide different protection from creditors and legal judgments. These are complex choices and should be considered with care. Visit the Merrill Edge® rollover page or call a Merrill Edge® rollover specialist at 888.637.3343 for additional information about your choices.

Neither Merrill Lynch nor any of its affiliates or financial advisors provides legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

The example presented is hypothetical and does not reflect specific strategies developed for actual clients. It is for illustrative purposes only.

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