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 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
401(k) plan), in most cases you will be able to transfer
your account balance out of your employer’s plan.
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.
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 transfers.
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.
If you elect a lump sum payment and do not transfer the money to
another retirement account (employer plan or IRA other than a
Roth IRA), you will owe a tax penalty if you are under age 59½
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 for retirement.
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 apply.
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
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.
U.S. Department of Labor
Topical Articles of Interest:
Types Of Plans
Payment Of Benefits
Filing A Claim