If you participate in a retirement plan such as the federal Thrift Savings Plan (TSP), you’ll have to decide what to do when you retire or change jobs. One option is to roll the account balance to an IRA. Not only does this maintain tax deferral, it gives you control over how your money will be invested. However, an IRA rollover is not your only choice. Other options might include:
Withdraw the cash..
Keep the money in your former employer’s plan.
Transfer money to a new employer’s plan.
Take some cash and roll the rest to an IRA.
If you need to spend some or all of the money in your plan, you might as well withdraw it right away. That’s especially true if you were born before 1936. People in that age group qualify for a special tax break, 10-year averaging, if they take all of their money out of a plan, so they may owe tax at a relatively low rate. After an IRA rollover, the opportunity to use 10-year averaging is lost forever.
If you don’t want to manage your own retirement fund, you may prefer to leave the money with a former employer (a strategy permitted by the TSP) or transfer it to a new one. Inside an employer’s plan, professionals handle the investment decisions. What’s more, the plan sponsor (the employer) has a fiduciary responsibility for the plan.
Before you implement an IRA rollover, keep in mind that money in an employer-sponsored retirement plan is generally protected from creditors, judgments, divorce settlements, etc., under federal law.
However, state law may not provide your IRA with the same asset protection. If you live in a state where IRAs aren’t fully sheltered, you may prefer the safe harbor of an employer’s plan.
In addition, many employer-sponsored plans, permit you to borrow half your account balance, up to $50,000. Such loans may be easier to get than bank loans, with less paperwork. Also, repayments (plus interest) go to your retirement account rather than to a bank.
On the other hand, you can’t borrow from an IRA. In fact, any outstanding loans must be repaid before a rollover, reducing the amount you’ll have in your IRA.
Therefore, if you have outstanding loans, or think you might want to borrow in the future, keeping money in an employer’s plan may be the best choice.
