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How to Protect Your Savings When You Switch Jobs

Posted November 7, 2012 by Belinda Mills to Investing 0 0
This post was written by a EasyFinance.com Community member. The views expressed below may not reflect the views of EasyFinance.com.

You've worked hard to put money into your employer's savings plan so what happens when you switch jobs? How about if you leave the workforce entirely? How can you make sure your money keeps working for you so you can retire comfortably?

You Can Leave it Right Where it Is

Even though you may be leaving a company forever, your retirement plan with them doesn't have to end. The money you've put aside through your employer's retirement savings plan can stay right where it is. You will continue to have an account with whatever financial services firm was used to administer the plan. Many employers allow you to do this, but some don't so if you're leaving your job you should ask the Human Resources department about the options you have for your retirement savings plan. If you like the types of investments your employer's plan offers, this is a good choice for you. Plus, you can leave the money there if you just need time to decide what to do with it.

You Can Roll The Money Over into an IRA

An IRA is an individual retirement account. It's set up like any investment account, except it's governed by rules that state you can't withdraw from without penalty it until you retire. Most financial services companies offer IRA accounts. The benefit of choosing your own company to manage your retirement funds is that you get 100% control over your funds. That means you can choose how the money is invested. You can pick the right mix of stocks and bonds, for example. Rolling over your money into an IRA has some advantages. Cashing out your retirement account when you switch jobs or leave the workforce sounds enticing, but rolling it over into an IRA is safer and wiser. Yes, it would be nice to have that big chunk of money you get by cashing out, but you will have to pay taxes on that payout. Plus, you won't have money set aside for retirement any more. Rolling over into an IRA means you can keep on investing your money tax-deferred. You won't owe taxes on your retirement account until you withdraw the money. Hopefully, that will be when you retire!

Just Don't Cash Out If You Can Help It

Try to avoid cashing out. Cashing out means you will see 20% of your pre-tax contributions fly right out the window. This is federal regulations. Not only that, your earnings will also be taxed at 20%. Your actual tax rate may be lower than this, but it doesn't matter, your tax rate for cashed-out retirement plans is 20%. If your actual tax rate is higher than 20%, you don't get to benefit...you will have to pay the difference. Wait until you are age 59.5 before you take money from your retirement account to avoid these types of taxes.

About Belinda Mills: Belinda Mills writes about taxes, frugal living, and investing.  You can see more of her work at at www.dollar-pig.com

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