When you change jobs or retire, you likely will be able to rollover the balance in a defined contribution retirement plan account—such as the government’s Thrift Savings Plan–to an IRA, maintaining the tax deferral while gaining control of your money.
Many people eagerly implement IRA rollovers. In some cases, though, that’s an error:
You might need cash. If you must spend the money in your retirement plan, you might as well take it, not roll it. That’s especially true if you were born before 1936, because you qualify for a special tax break, 10-year averaging. With 10-year averaging, if you take all of your money out of a plan, you probably will owe tax at a relatively low rate. After a rollover, 10-year averaging is not permitted.
You might be worried about asset protection. Money in an employer-sponsored retirement plan is generally protected from creditors, judgments, divorce settlements, etc., under federal law. State law may or may not provide your IRA with the same asset protection.
