If you have recently changed jobs or are retiring, you may have retirement assets under your previous employer’s plan. That brings the question — what do you do with your retirement assets? It is important to fully understand your options before making a distribution decision. When you leave an employer-sponsored retirement plan you have many options. Those options include: (1) rolling the money into an individual retirement account (IRA), (2) rolling the money into a new employer’s qualified plan (if available), (3) leaving your money where it is in your former employer’s plan (if allowed by the employer), and (4) taking the money in cash.

Taking the money in cash is usually a bad idea because retirement accounts are funded with pretax dollars and will be subject to ordinary income tax upon distribution. If you are under age 59 ½ and do not qualify for an exception, you will also be subject to an additional 10 percent federal early withdrawal penalty. Depending upon your tax bracket, the tax and penalty can eat up more than 40% of your retirement savings. Besides, if you take the money in cash, you risk spending it on things other than retirement living expenses. That’s why rollovers play such an important part in helping you continue to accumulate money for retirement.

What is a rollover? A rollover is simply taking a distribution from one tax-deferred retirement plan and depositing those funds into another eligible retirement plan. The most important benefit you get when you roll your funds into an IRA is continued tax deferral. Because the money you’ve put in the plan is pretax (in most cases), you can only continue to defer paying taxes on it if your assets stay in an eligible retirement plan.

There are several reason to consider rolling retirement funds directly from a former employer’s plan into an IRA: (1) Simplicity — You simply fill out forms authorizing the employer’s plan and your IRA institution to transact on your behalf. This is also important because you avoid the mandatory 20 percent withholding that applies to indirect rollovers. (2) Expanded range of choices – Most employer-sponsored plans are limited in the number and type of investment options they offer. With an IRA, you can invest your retirement money in any combination of stocks, bonds, mutual funds, money market accounts and annuities. Also by rolling into an IRA you can get the added benefit of working with a financial professional. (3) Consolidation — If you change jobs frequently, it may make sense to consolidate all of your retirement savings in one place. Leaving funds in multiple retirement accounts increases your paperwork and record-keeping responsibilities. (4) Control — With an IRA, you can retain control of how your money is invested and can work with an advisor to diversify your holdings. Some employer plans may limit investment options, change plan providers or retain a certain portion of the retirement assets in company stock.

Generally, there is no immediate deadline for moving your funds from an employer plan (it depends on the specific terms of the employer plan). However, by waiting you are potentially limiting your investment options and your ability to adequately diversify. If you have recently changed jobs, retired, or have retirement money in an ex-employer’s retirement plan it may be a good idea to consult with a financial advisor to discuss your options.

Forrest Allen Johnson, III is a financial advisor and vice president with Morgan Keegan & Company, Inc. in Natchez.