Take It or Leave It: the Retirement Savings Question

After working hard over the years and investing diligently in your retirement savings plan, the question may arise when you leave your job: Should I take my money with me or keep it in my employer’s plan?

The answer may not be as simple as it seems. There are reasons for taking your money and reasons for keeping it with your employer. As with so many questions about finances, it depends on your personal situation.

If you are leaving to take another job with an employer that has its own retirement plan, perhaps you should consolidate your retirement funds in your new employer’s plan. For instance, if you have funds with a previous employer, you might consolidate your plans into your ICMA-RC plan to save you time and paperwork (e.g., one statement for all of your accounts) and simplify your fund allocation process.

Most financial planners agree that one popular choice is not the wisest — cashing out your funds. In almost every case, it just doesn’t make sense to cash out of your tax-deferred accounts when you leave your employer.

While a cash payout may be tempting, you will have to pay taxes on the pretax savings and earnings. Don’t forget that these are taxed at your income tax bracket and not at the preferential capital gains rate. A large payout could even bump you into a higher marginal tax bracket, meaning you would be paying a higher rate on your withdrawal than you pay on your regular income.

Depending on the source of the funds and your age, you may have to pay a 10 percent early withdrawal penalty if the money was saved in a 401 defined contribution plan and you will not be at least age 55 in the year you leave your job, or age 59½ for an IRA. (There are no penalties from a 457 deferred compensation plan.)

In addition, if you still have years before you finally retire, spending the money today deprives you of money you could have available at retirement and diminish the benefit of tax-deferred compounding on your earnings. This could amount to a significant loss from your retirement nest egg.

Instead of choosing the big payoff, retirees are increasingly encouraged by employers, financial planners and the retirement planning industry to stay in the employer sponsored retirement plan. There are key reasons fueling this approach: with lower plan administration fees, the value of your nest egg will increase; and, employer-sponsored programs tend to have low-cost investments that are not available to individual investors.

In addition, retirees who stay in the plan reap the benefits of lower costs. Typically, plan providers charge fees based on assets under management. As a participating employee, you pay the institutional rate on investments, which is often lower than the prices charged to an individual investor.

By federal law, participants may keep their money in their employer’s retirement plan if they maintain more than $5,000 in it. In the past, employers have encouraged employees to take the money with them to cut recordkeeping costs. However, in recent years, employers have begun to encourage retirees to stay put.

When the time comes for choosing disbursement options, employers have recognized that employees need as much help managing their assets at the end of their careers as they did when they were employed. A major advantage for retirees is that they maintain tax-deferred status and access to all the communications and educational materials the sponsor provides.

Deciding whether to take your investments with you or leave it in the employer’s program is not simple-you should weigh your options. However, if you do decide to transfer your account to an IRA, consider ICMA-RC’s No-Fee* Vantagepoint IRA. You can enroll quickly and easily using the IRA Wizard at www.icmarc.org/ira. For additional assistance, you may contact our Investor Services representatives at 1-800-669-7400.

* The No-Fee Vantagepoint IRA has a low initial minimum investment of $1,500, which is waived if funded through the convenience of an automatic investment program.