When you’re cleaning out your classroom and packing up boxes for a
career change, new district or retirement, remember to pack up your 457
savings as well.
Making a transition from job to job – no matter
the reason – can be a frenzied process. Sometimes the last thing you
want to worry about is what to do with the money in your plan. But
taking educated steps can ensure that your retirement money remains in
your control.
You can transfer the funds into an approved
retirement account or “cash out” and take a lump sum payment. Taking the
cash can be tempting, but also very costly. You’ll actually receive
only a portion of your balance, because you’ll owe federal taxes at
rates as high as 35%, plus California state taxes. Despite the
penalties, 45% of Americans withdraw the money from their voluntary
retirement accounts early, according to a 2005 study by Hewitt
Associates.* Only 23% of those surveyed roll the money into an individual retirement account (IRA) or other qualified retirement plan.
Roll Over for Growth
You may want to think about keeping your investment options open –
allowing your money to grow into a comfortable retirement nest egg by
initiating a direct or standard rollover into your new
employer's 457 plan (if it accepts rollovers) or a new IRA. This will
allow your money to continue growing tax-deferred.** For a direct
rollover, your plan’s distribution check
may, at your employer’s discretion, be given to you or sent directly to
the trustee of your new IRA or plan. In either case, the rollover check
must be made payable to the trustee.
In a standard
rollover, the check is made payable to you and you make your own
arrangements to roll over the funds into an IRA or other plan within 60
days of receiving the check. The drawback to this type of rollover is
that your former employer is required by law to withhold 20% of your
distribution for federal income taxes. To avoid a taxable distribution,
you’ll have to come up with that amount from another source in order to
complete the rollover within the 60-day period.
Reap Retirement Rewards
If you are moving to another district, be sure to review the 457
investment options available in your new plan before rolling over your
old plan. If you are leaving your job and want to roll your 457 plan
assets into an IRA, contact your district for the appropriate forms.
*
Source: “Hewitt Study Shows Half of U.S. Workers Cash Out of 401(k)
Plans When Leaving Jobs,” Hewitt Associates, July 25, 2005.
** Withdrawals in
retirement will be taxed as ordinary income.