Retirement Savings Plan
Part 5: Taking Your Retirement Benefit With You
If you leave an employer before you reach retirement age, whether or not you can
take your benefits out and/or roll them into another tax-qualified plan or
account will depend on what type of plan you are in.
If you leave before retirement, can you take your retirement benefit with
If you are in a defined benefit plan (other than a cash balance plan), you most
likely will be required to leave the benefits with the retirement plan until you
become eligible to receive them. As a result, it is very important that you
update your personal information with the plan administrator regularly and keep
current on any changes in your former employer’s ownership or address.
If you are in a cash balance plan, you probably will have the option of
transferring at least a portion of your account balance to an
individual retirement account
or to a new employer’s plan.
If you leave your employer before retirement age and you are in a defined
contribution plan (such as a 401k plan), in most cases you will be able to
transfer your account balance out of your employer’s plan.
What choices do you have for taking your defined contribution benefits?
A lump sum - you can choose to receive your benefits as a single payment from
your plan, effectively cashing out your account. You may need to pay income
taxes on the amount you receive, and possibly a penalty.
A rollover to another retirement plan - you can ask your employer to transfer
your account balance directly to your new employer’s plan if it accepts such
A rollover to an IRA - you can ask your employer to transfer your account
balance directly to an individual retirement account (IRA).
If your account balance is less than $5,000 when you leave the employer, the
plan can make an immediate distribution without your consent. If this
distribution is more than $1,000, the plan must automatically roll the funds
into an IRA it selects, unless you elect to receive a lump sum payment or to
roll it over into an IRA you choose. The plan must first send you a notice
allowing you to make other arrangements, and it must follow rules regarding what
type of IRA can be used (i.e. it cannot combine the distribution with savings
you have deposited directly in an IRA). Rollovers must be made to an entity that
is qualified to offer individual retirement plans. Also, the rollover IRA must
have investments designed to preserve principal. The IRA provider may not charge
more in fees and expenses for such plans than it would to its other individual
retirement plan customers.
Please Note: If you elect a lump sum payment and do not transfer the
money to another retirement account (employer plan or
other than a Roth IRA), you will owe a
tax penalty if you are under age 59 and do not meet certain exceptions. In
addition, you may have less to live on during your retirement. Transferring your
retirement plan account balance to another plan or an IRA when you leave your
job will protect the tax advantages of your account and preserve the benefits
What happens if you leave a job and later return?
If you leave an employer for whom you have worked for several years and later
return, you may be able to count those earlier years toward vesting. Generally,
a plan must preserve the service credit you have accumulated if you leave your
employer and then return within five years. Service credit refers to the years
of service that count towards vesting. Because these rules are very specific,
you should read your plan document carefully if you are contemplating a
short-term break from your employer, and then discuss it with your plan
administrator. If you left employment prior to January 1, 1985, different rules
If you retire and later go back to work for a former employer, you must be
allowed to continue to accrue additional benefits, subject to a plan limit on
the total years of service credited under the plan.
If you are leaving an employer before retirement, find out whether you can roll
your benefits into a new plan or into an IRA.
If you are leaving your benefits in your former employer’s plan, be sure to keep
your contact information up to date with the former employer, and keep track of
the employer’s contact information.
If you are considering taking your benefits out as a lump sum, find out what
taxes and penalties you will owe, and make a plan on how you will replace that
income in retirement.