Deciding what to do with your retirement balance when you leave your place of employment is an important decision. Taking your money in a lump sum distribution can be very tempting. You may be young and feel you can simply start over again in your new employer's plan. You may feel your balance is so small that's its not worth looking into your other options. Before you make a decision it is important that you research all of your options. Remember this is money that you have been setting aside for your retirement and even small balances, early in your career, can have a major impact on your savings at retirement. Opting for options other than a lump sum distribution may:
- Allow your money to continue to grow tax-deferred
- Help you avoid paying a 10% early withdrawal penalty if you are under age 55
- Help you avoid having 20% of your taxable distribution withheld for federal income taxes
- Postpone having to pay additional federal tax on your current tax filing if you are in a tax bracket that is greater than 20%
- Delay payment of any applicable current state and local taxes
Further evidence of the advantage of keeping your retirement money in a tax-deferred account instead of receiving a lump sum distribution can be found in the chart below. It shows what your account would be worth, assuming a 6% rate of return, at the end of two, five and ten years. For example, suppose that you have $30,000 working tax-deferred for just five years. With an annual compounded rate of return of 6%, your savings would grow to $40,147. That's a before tax gain of $10,147 - and money that you would never see if you opt for a lump sum distribution.
| Initial Fund Value |
Fund Value at End of 2 Years |
Fund Value at End of 5 Years |
Fund Value at End of 10 Years |
|
$10,000
|
$11,236 |
$13,382 |
$17,908 |
| $20,000 |
$22,472 |
$26,765 |
$35,817 |
| $30,000 |
$33,708 |
$40,147 |
$53,725 |
| $40,000 |
$44,944 |
$53,529 |
$71,634 |
| $50,000 |
$56,180 |
$68,911 |
$89,542 |
This chart is for illustrative purposes only. Your actual returns will differ from those in the chart based on your investments and the time period of your investments.