Commentary

What Happens to Your Retirement Plan When You Leave Your Job?
By Saghir Aslam
Rawalpindi, Pakistan

(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

If you’re changing jobs, have been displaced, or are retiring, one of most important decisions you may face is how to handle the money you’re worked hard to earn. Saving you were accumulated in your qualified employer-sponsored retirement plan (QRP), like a 401(k), 403(b), or governmental 457(b), may represent a substantial source of retirement income. Choosing an appropriate strategy can help you minimize taxes and make the most of your savings. Generally, you have four options for your QRP distribution:

Rolling your money directly into an IRA allows your assets to continue their tax-advantaged status and growth potential, the same as in your employer’s plan. An IRA often gives you access to more investment options than a typically available in an investment advice.

You generally avoid current income taxes, including a 10% additional tax on early distributions for those younger than 59½ when rolling over to an IRA.
You can maintain your retirement savings at the same farm as your other financial accounts.
Other exceptions to the 10% additional tax distributions taken from the IRA before age 59½ including higher education and first time homebuyer.
Traditional and Roth IRA contributions and earnings are protected from creditors in federal bankruptcy proceeding up to a maximum of $1, 283, and 025, adjusted periodically for inflation.

IRA fees and expenses are generally higher than those in a QRA.
Required minimum distributions (RMDs) must be taken from Traditional, SEP, and SIMPLE IRAs by April 1 following the year you reach age 70½ to avoid a 50% excise tax on every dollar under-distributed.
Distributions are subject to ordinary income on any before tax-amount and, if taken prior to age 59½, maybe subject to a 10% additional tax, unless an exception applies.
IRA’s are subject to state creditor laws regarding malpractice, divorce, creditors outside of bankruptcy, or other type of lawsuits.
If you hold shares of your employer’s stock (company stock)in your QRP and those shares have increased in values since you purchased them, the difference between the price you paid (cost basis) and the stock’s price is called the net unrealized appreciation (NUA). You lose the ability to take advantage of favorable tax treatment of the NUA if you roll the shares into an IRA.
Leave your retirement saving in your former employer’s retirement plan (if allowed).

While this approach requires nothing of you in short term, managing multiple retirement accounts at different financials intuitions and with former employer can be cumbersome and confusing. And you will continue to be subject to the rules of each QRP regarding investment choices, distributions options, and loan availability.

No immediate action is required.
Investments keep their tax advantaged growth potential.
You can typically keep your current investment and continued to have access to them. Please contact your plan administrator for details.
QRP fees and expenses are generally lower than in an IRA.
You avoid a 10% additional tax on distributions from the plan if you leave the employer in the year you turn age 55 or older (age 50 or older for certain public safety employees).
Generally, QRPs have bankruptcy and creditor protection under the Employees Retirement Income Security Act (ERISA).
Favorable tax treatment may be available if you have appreciated employer securities in the plan.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)