Moving your retirement plan

When you change jobs and leave an employer that has a 401(k) or other defined-contribution retirement plan, you usually arrange to transfer your retirement account. (This is not the case with a defined-benefit plan, which pays you a fixed benefit based on what you have vested.)

With a defined-contribution plan, you ask your ex-employer to transfer your plan assets to a new retirement plan or IRA using either a trustee-to-trustee transfer or lump-sum distribution.

The following calculator lets you calculate whether you are on target to achieve your retirement goal:

Am I saving enough? What can I change?

With a trustee-to-trustee transfer, you don't handle the money. Instead, your ex-employer or another trustee transfers your plan assets to the trustee of the new retirement plan or IRA that you designate. As a result, you pay no income taxes and avoid an early-withdrawal penalty.

With a lump-sum distribution, you do handle the money. You have 60 days to complete a rollover, which involves moving the plan assets to your new employer's plan or an IRA. If you pass the 60-day deadline, you will owe income taxes and face an early-withdrawal penalty. (If you're 59 1/2 or older, the penalty won't apply.)

You are only allowed one rollover in a year with a lump-sum distribution. The clock starts ticking on the date you take your distribution. Furthermore, your ex-employer is required to withhold 20% of the lump sum for income taxes. In order to recover this 20%, you must scrape together the amount of the withholding from another source.

For example, say you are age 52, have $250,000 in your retirement plan, and accept a lump-sum distribution. Your employer withholds 20%, or $50,000, and distributes $200,000 to you. You have 60 days to recover the $50,000 that was withheld and roll over the full $250,000 to avoid the 10% penalty.

If you were born before 1936, you may be able to stretch out your tax bill over 10 years. For more on this rule, see "Lump-Sum Distributions" in IRS Pub. 575: "Pension and Annuity Income."

Instead of moving your retirement plan, you may be able to leave your plan with your ex-employer if the plan has more than $5,000 in assets. Your decision to leave your assets with your ex-employer's plan will likely be influenced by the investment performance of your retirement plan at your ex-employer. You may decide you will earn higher investment returns by leaving your plan assets where they are.

The following calculator lets you calculate your earnings on various retirement accounts:

What will I earn with this account?

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.