Retirement plans are supposed to be simple, but they are more complex than we’d like. That sometimes makes them seem so impossibly complicated that the best thing is just to do nothing. Doing nothing is precisely the wrong thing to do; the complexity isn’t nearly as complicated as it is sometimes made out to be.
Here’s one issue: What do you do with your retirement when you leave a job?
The short answer is roll it over into an IRA.
The long answer is that your retirement rollover is not free money. It is money for your retirement. Do not spend the money unless you absolutely, positively must. To begin with, you have to pay taxes on the withdrawal, including a 10% penalty if you touch the money before age 59 1/2. This makes your retirement plan an expensive source of funds. At least know the cost before you make the decision to spend it.
If you are facing a choice between not giving your children dinner or touching your retirement plan, then touch your retirement plan — but not until you reach that point. A vacation, a car, or a fancy new purse are not valid reasons to spend your retirement money. Life is short, but it’s not that short.
So, assuming there is plenty of food in the house, you want to roll your retirement plan into another retirement plan. The easiest thing is to find a low-cost, large-cap U.S. equity mutual fund. (Please note that this may not be the best investment, and if you have the time and energy, you should do your own research. If you have no better ideas, though, this type of fund should be good enough in the long run.) Vanguard, Fidelity, and T. Rowe Price are among companies offering these types of funds, and none of these companies pay me to recommend them.
If you want to do research, the best place to start is Morningstar. The company offers an unbiased analysis of different types of investments.
Whatever mutual fund company or brokerage firm you decide to use, the customer service staff will know how to handle a retirement rollover. In many cases, the representative can do all the work once you give your authorization. In fact, that’s usually a better option than doing it yourself, because there will be a 20% tax applied on a distribution that you receive, even if you eventually roll the money over. Yes, you’ll get it back at tax time, but why deal with it?
It’s really that easy. The details on the IRS website cover all sorts of situations that probably don’t apply to you — you may want to refer to that information to make sure you aren’t missing something, but don’t let it scare you. The IRS specializes in overkill. That’s it job — to make sure that every single detail is covered. Too many people in the financial services industry like to use all of these details to confuse people, to make you think that you need expensive services that may not be necessary.
But if you have left your job, you do need to roll over your retirement plan.