Avoid a Tax Penalty and Protect Your Financial Future When Retiring or Changing Jobs

If you're leaving your current employer because you are retiring or changing jobs, one of your most important challenges will be deciding what to do with your current retirement savings. Rolling your retirement assets into an IRA can save you money and keep your assets growing.

There are three main options for transitioning your retirement savings when you retire or change to a new job:

• Cashing Out—This choice can be costly because you'll owe taxes and penalties now.

• Transferring—If you're changing jobs, you may want to move your money to your new employer's retirement plan. This can be a cost-effective solution, if the option is available.

• Reinvesting—Rolling over your assets into an individual retirement account (IRA) can save you money and keep your assets growing, too. This option is available whether you are retiring or simply moving to a new opportunity.

Why is cashing out so expensive? Your accumulated retirement savings are generally untaxed income, which means taxes are due now if you withdraw your money. If you ask your employer to write you a check for your retirement savings, 20% will be automatically withheld for federal income taxes. Of course, you could ultimately pay much more tax on this money, depending on your income bracket. Local and state taxes may also apply, depending on the tax laws where you live. If you're younger than 59-1/2, you'll also pay a 10% withdrawal penalty when you cash out, which further adds to the cost of this option.

Transferring or reinvesting your retirement savings can save you money by deferring taxes and avoiding penalties. And if you transfer your retirement savings directly to another tax-deferred vehicle, such as a new employer's retirement plan or an IRA, remember to request a trustee-to-trustee transfer or a direct rollover for the full amount of your retirement savings account and then have that amount deposited directly into your rollover account. It's the only way to defer taxes on the entire account and avoid penalties.