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An individual retirement account (IRA) should be one of the cornerstones of anyone’s nest egg, offering great tax benefits to anyone socking money away.

While individuals can and should contribute to their IRAs on a monthly basis, many don’t. According to the Employee Benefit Research Institute, the largest source of contributions come from individuals who, when they leave a job, move their money into their accounts from an employer-sponsored plan like a 401(k) or 403(b).

This is fine, but most investors don’t understand what options they have for their IRAs at different stages of their career, and knowing that can be quite beneficial from a tax or savings point of view.

Generally, there are four options. The first and easiest is to keep some or all of your savings in your former employer’s plan. You can’t make new contributions to it, but if you like the funds in the plan this can be a viable option.

Second, you can transfer assets to your new employer’s plan, assuming they have one. If nothing else, this can make tracking your investments simpler and more convenient.

The third option is to simply cash out your balance, though this is rarely a good idea for younger investors. If you’re more than six months away from 60 (that is, 59-and-a-half years old or younger), the IRS will generally consider your payout an early distribution, which is subject to an early withdrawal penalty of 10 percent as well as state and federal taxes. It’s difficult to imagine the circumstances that would make this the right choice for anyone not nearing retirement age.

Finally, you can opt to roll your plan into an IRA. This is an option that investors should strongly consider, as it opens up a much broader menu of investment choices. Rather than the small number of mutual funds that a 401(k) can buy into, IRAs have access to the entire universe of mutual funds, individual stocks, variable annuities, and so on. In addition, rolling the plan into an IRA allows you to transition your retirement accumulation vehicle into a tax-efficient distribution vehicle and partner up with an investment professional who can help you customize your investments according to your specific needs and circumstances.

If your employer does offer a 401(k) or 403(b), you should absolutely take advantage of it. However, don’t forget the options you have when you transition out of your current situation. You worked hard to save, and making the wrong decision can undo some of that work.


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