Leaving UC? What to Do with Your Savings

According to a recent analysis by Fidelity, one in every three retirement savings plan participants has cashed out of a previous employer’s savings plan, often when changing jobs.*

It sounds like an easy way to solve a short-term cash crunch, doesn’t it? Liquidating an old 403(b), 457(b) or 401(k) plan may not seem like a big deal, especially if you have a small balance. But over a long period of time, the consequences of cashing out can be devastating to the average investor.

Here’s why: Once you withdraw those savings, they’re gone—and they can’t be replaced. The power of a tax-deferred account, such as a 403(b), is that it allows pre-tax contributions to compound without taxes eroding that growth. Over time, earnings can generate earnings of their own. And that can help you accumulate more money than you would in an ordinary taxable account.

The cost of cashing out

Whether you need $3,000 or $30,000, when you dip into your retirement savings plan account, the impact can have long-term effects on your savings. If you’re a younger investor, you miss out on a long-term growth opportunity, which can set your retirement savings back considerably. If you’re older, cashing out may take away a key part of your retirement income picture.

There is an immediate cost to cashing out, too. For one thing, it can generate a large tax bill. Typically, your plan automatically withholds 20% of your balance and sends it directly to the IRS to cover the taxes you may need to pay on that withdrawal. And if you are under age 59½, you may also pay a 10% early withdrawal penalty.

That means you will give the IRS nearly a third of the money you’ve been saving for years.

Alternatives to cashing out

Fortunately, there are alternatives that can help keep your savings intact—and, potentially, growing. If you need money or are considering what to do with an old 403(b), 457(b), or 401(k), here are some options:

  • New to UC?  Roll over your old 403(b), 457(b), or 401(k), balance into the UC 403(b) or 457(b). Doing so can make it easier to keep track of your retirement savings. In addition, you benefit from a plan that’s designed to help keep your fees low. Under the UC Retirement Savings Program (UCRSP), you can choose from a variety of investment options, including those from the UCRSP Fund Menu, which carry lower expenses than many similar publicly traded investment options and are exclusive to UCRSP participants. Learn how to roll over your old account balance.
  • Leaving UC? Stay in your UC plan. Leaving UC doesn’t mean you have to leave the UC 403(b), 457(b) or DC plans. While you won’t be able to make new contributions to your UCRSP plan, your money will continue to benefit from tax-deferred growth potential and generally low expenses. Learn how to keep your retirement savings working.
  • Having a financial hardship? If you have financial trouble and don’t have a source of money elsewhere, you may be able to take a loan from the 403(b) plan. While neither is an optimum solution, a loan is generally a better option than a hardship or emergency withdrawal. The UC 403(b) and 457(b) plans include provisions for these types of withdrawals.

Neither a loan nor a withdrawal is an optimum solution, however. If you are able to take a hardship or emergency withdrawal, you will owe ordinary income taxes and possibly an additional 10% penalty on the amount you withdraw. If you take a plan loan, you’ll avoid the taxes and penalties, and you’ll have to pay yourself back, with interest. However, since your investments will be liquidated to make the loan, if the market shoots up, you’ll miss those gains.

Next steps

Before you make a decision, you may want to take these steps:

  • Compare the fees and expenses charged by your old plan and IRA provider to the UCRSP fees.
  • Know your preferences for managing your accounts. For example, you may like having your assets with one provider.
  • Evaluate the potential tax impact of any move. Make sure you understand how taxes may be affected by the choice you make.
  • Get help from a Retirement Planner. Fidelity Retirement Planners can help you evaluate your decision based on your complete financial picture.

* Fidelity analysis of 800,000 terminating participants in 21,200 plans; age based on 12/31/12 data.

 

ERNA

Get the Facts

Keep your savings working for you, even when you stop working for UC. Our fact sheet can help you weigh your options. 

Related Articles