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What retirement issues should I consider when changing jobs?

The days of spending an entire career with one employer and being covered by the company pension plan are virtually over.  Harvard University reports women are leaving corporate America at twice the rate of men either because they are changing jobs or starting their own businesses.  The Bureau of Labor Statistics report men over 25 stay with an employer an average of 5.3 years, while women remain with their employer for only 4.7 years (just a few months short of the 5 years it typically takes to vest in a 401(k).  If you've just taken a new job or decided to start your own business, one of the many things you should be considering is how it will affect your retirement savings plan.

Unfortunately, too few of those changing jobs transfer their retirement funds to an IRA or their new employer's investment plan. Around 68% of retirement account lump-sum distributions made to workers changing jobs were not rolled into another tax-deferred plan, according to ERBI.  Many plans are cashed out to cover expenses or pay down debt and that can be a very costly mistake. The tax penalties are typically higher than the interest on your credit cards, so it just doesn't make sense to use money from your 401(k) to pay off debt.

Instead of cashing in on your plan consider one of the following:

• Transfer the money to a Rollover IRA.
  If you haven't found a new job yet, your new employer has no retirement plan, or you are self-employed, a Rollover IRA offers a broad range of investment possibilities. Even if your new employer offers a 401(k) plan, consider transferring your funds to a Rollover IRA. Unlike most 401(k) plans, a Rollover IRA allows you to control where your money is invested. Never mix 401(k) funds with an existing IRA. If you have an existing IRA, set up a new one to roll your 401(k) money into.

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• Roll the Money Over into Your New Employer’s Plan.
  You can usually move your money from your old plan into the new one even before you are eligible to contribute to the new plan. If you already received a cash-out check from your old plan, you have 60 days to roll it to a new plan and still avoid the taxes and penalties. The 20% they withheld from the check can be recovered when you file your taxes at the end of the year, but can't be rolled back into your 401(k).
• Leave Your Money Right Where It Is.
  If your balance is $5,000 or more, you can leave your money in your current employer's plan until you retire. At least until you have a chance to assess your options, this is a good temporary solution to protect your money.

Unfortunately, you are limited to contributions of $3,000 for the tax year 2002 to an IRA—unless you have reached the age of 50, which means you are eligible for catch-up contributions of $500 per year. If you're self-employed, that may not be enough to suit your savings needs.

In that case you may want to consider three other types of retirement plans available to small business owners:

• SIMPLE
  The Savings Incentive Match Plan for Employees is a simplified retirement plan for small businesses. It must cover all employees earning over $5,000 per year (in the previous two years). Employees, including the business owner, can contribute up to $6,000 per year to the plan. The employer must also match up to 3% of contributing employees' compensation.
• SEP-IRA
  Small business owners can contribute as much as 15% of earned income, up to $30,000, to their retirement plan utilizing a SEP-IRA (simplified employee pension plan). However, all employees must be covered under the plan if they are at least 21 and have performed service during three of the last five years.
• Qualified Retirement Plans (QRPs)
  Small business owners can establish these plans to provide retirement income for eligible employees while at the same time enjoying business tax deductions. Two main types of plans are offered: Profit Sharing and Money Purchase Pension. Profit Sharing plans offer flexible and discretionary annual contributions, while Money Purchase Pension plans set mandatory and fixed annual contributions. Contributions are limited to 100% of an employee's compensation up to $40,000. These plans are more sophisticated and complex then SEP-IRAs, so clients are strongly advised to seek guidance from a tax advisor before establishing a QRP.

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