Changing Careers And Your Retirement Plan

The days of spending an entire career with one employer and being covered by the company pension plan are virtually over. Harvard University reports women are leaving corporate America at twice the rate of men either because they are changing jobs or are starting their own business. The Bureau of Labor Statistics report men over 25 stay with an employer an average of 5.3 years, women remain with the employer for only 4.7 years (just a few months short of the 5 years it typically takes to vest in a 401k or to qualify for a pension, by the way). Women are opening their own businesses at twice the rate of men.

If you’ve just taken a new job or decided to start your own business, one of the many things you should be considering is how it will affect your retirement savings plan.

Unfortunately, too few of those changing jobs transfer their retirement funds to an IRA or their new employer’s investment plan. In 1996, 62% of retirement account lump-sum distributions made to workers changing jobs were not rolled into another tax-deferred plan according to ERBI. Oftentimes, the plans are cashed out to cover expenses or pay down debt and that can be a very costly mistake.

If you choose not to roll your savings into a new plan or into an IRA, be prepared to pay hefty federal and state income taxes and early withdrawal penalties. The tax penalties are typically higher than the interest on your credit cards, so it just doesn’t make sense to use money from your 401(k) to pay off debt.

You may want to consider avoiding cash payouts from a 401(k) or having the roll-over issued directly to you. This will help reduce additional taxes and penalties paid on those dollars set aside for your retirement.

• Instead of cashing in on your plan consider one of the following:Transfer the money to an IRA. If you haven’t found a new job yet, your new employer has no plan, or you are self-employed an IRA offers a broad range of investment possibilities. Even if your new employer offers a 401(k) plan, consider transferring your funds to an IRA. Unlike most 401(k) plans, an IRA allows you to control where your money is invested.

• Roll the money over into your new employer’s plan. You can usually move your money from your old plan into the new one even before you are eligible to contribute to the new plan. If you already received a cash-out check from your old plan, you have 60 days to roll it to a new plan and still avoid the taxes and penalties. The 20% they withheld from the check can be recovered when you file your taxes at the end of the year, but can’t be rolled back into your 401(k).
• Leave your money right where it is. If your balance is $5,000 or more, you can leave your money in your current employer’s plan until you retire. At least until you have a chance to assess your options, this is a good temporary solution to protect your money.

Unfortunately, you are limited to contributions of $3,000 per year to an IRA, $3500 age 50 or older. Especially if you’re self-employed, that may not be enough to suit your savings needs.

In that case you may want to consider two other types of retirement plans available to small business owners:

• SIMPLE – The Savings Incentive Match Plan for Employees is a simplified retirement plan for small businesses. It must cover all employees earning over $5,000 per year (in the previous two years). Employees, including the business owner, can contribute up to $9,000 per year to the plan. The employer must either match up to 3% of contributing employees’ compensation or make a contribution of 2% of compensation for each eligible employee.
• SEP-IRA – Small business owners can contribute as much as 25% of earned income, up to $41,000 to their retirement plan (to reach the maximum amount more than one plan is necessary) utilizing a SEP-IRA (simplified employer pension IRA). However, all employees must be covered under the plan if they are at least 21 and have performed service during the last three years.

BLS stat Working Woman 2/99
62% stat from Working Woman 2/99

Emily S Hazlett is Vice-President: Investments at ENB Insurance Agency, Inc., a wholly owned subsidiary of Evans National Bank.