It is extremely rare in today's world for a physician to stay with the same employer for his or her entire career. One of the biggest decisions to address is what to do with your old retirement account. Generally, you have four options.
It is extremely rare in today’s world for a physician to stay with the same employer for his or her entire career. From a financial perspective this usually triggers a whole new set of benefits and decisions to make. One of the biggest decisions to address is what to do with your old retirement account.
You generally have four different options:
1. Do nothing
You can leave your retirement account at your old employer’s retirement plan. This option has limited investment options and the communication for account changes, updates, etc., is usually tougher to stay current on. If several job changes are made, it may also become tough to keep track of multiple accounts and multiple asset allocation strategies for each set of investment options. However, an employer plan's investment array may be adequate, and you should consider costs. Employer plans may have access to low-cost classes of investment options but sometimes have hidden fees as well.
2. Roll your old account into your new employer retirement plan
Most employer plans allow you to roll in old retirement accounts from previous employers. I would recommend using this option for smaller accounts where creating a separate IRA account would become more of a hassle from an ease of tracking and fee standpoint.
3. Withdraw your funds
Generally, this option is not desirable for most people, as this action would result in income taxes due on the entire amount withdrawn, and if withdrawn before age 59-and-a-half, may be subject to a 10% penalty.
4. IRA Rollover
This can be a beneficial option to choose. An Individual Retirement Account (IRA) allows you to have the most flexibility from a control and asset allocation standpoint. I would suggest using an independent platform that allows you to invest your IRA dollars into the widest array of investment options out there.
One of the biggest constraints that we see in employer sponsored qualified retirement plans is that they generally have a limited amount of investment options for each asset class to create a well-diversified portfolio (if they even have an option for each asset class). Having the ability to invest in the widest array of choices and not being tied to one set of options is a large advantage.
Another nice advantage of setting up an IRA is that you can continue to combine all future retirement accounts into this one IRA account for consolidation and ease of management purposes. You do not have to create a new and separate IRA for each old account. An additional benefit that you would have once in this option is you can do an IRA to Roth IRA conversion if it makes sense in your current tax bracket and overall retirement strategy.
Withdrawals from IRAs and qualified plans prior to reaching age 59 1/2 will generally be subject to a 10% penalty.
For a Roth IRA, earnings withdrawn prior to reaching age 59½ and/or not meeting the five-year holding period may be subject to a 10 percent penalty in addition to income tax. After-tax contribution amounts are generally returned income tax free; however, for Roth conversions, if converted amounts are not held for the five-year period, distributions may be subject to a 10 percent penalty. Investors' anticipated tax bracket in retirement will determine whether or not a Roth IRA versus a traditional will provide more money in retirement. Generally, investors who are in a higher tax bracket at retirement relative to their current tax bracket while making contributions to a Roth IRA benefit more than an investor who is in a lower tax bracket at retirement.
This should not be considered as tax or legal advice. Please consult a tax or legal professional for information regarding your specific situation.
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource group is not affiliated with Securian Financial Services, Inc. The answers provided are general in nature and are not intended to be specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances. 569813/ DOFU 10-2012