If you have changed jobs, been offered a pension buy-out, retired, or are getting ready to retire, you have a very important decision to make about the assets in your former employer’s retirement plan. A variety of distribution options are available to you, and the one you choose will depend on your previous employer’s plan document, your specific needs and your tax advisor’s guidance. Distribution options available under current IRS regulations include:
Leaving your assets in your former employer’s plan: If your balance meets current governmental limits and the employer’s plan document provisions, you may be able to leave the assets in the current plan. The sponsoring employer retains responsibility for selecting investments available to you. The plan document controls distribution and beneficiary options.
Transfer the plan directly to your new employer’s plan: If permitted, you can transfer your old plan directly into your new employer’s retirement plan. A transfer allows you to avoid the mandatory 20% tax withholding and potential early withdrawal penalties on distributions. You will defer income taxes on your assets until you make withdrawals from your new employer’s plan. Once you begin taking withdrawals from the plan there will be a mandatory 20% tax withholding on all distributions.
Directly transfer or rollover your plan into an IRA: Directly transferring your distribution to an IRA allows you to avoid the mandatory 20% tax withholding and potential early withdrawal penalties. You will defer income taxes until you make withdrawals from the IRA. Once you begin drawing from the plan you and your advisor can determine the appropriate amount of Federal and State tax to withhold.
Keep/spend the distribution from the qualified employer plan:If you choose to keep or spend your distribution, 20% of the taxable portion will be withheld immediately. You will be subject to federal (and state) income taxes on the taxable portion of the amount distributed, and a 10% penalty for early withdrawal may apply if you are under age 55 when you retire or terminate service. The amount of the distribution may increase your modified adjusted gross income (MAGI) to a threshold that imposes an additional 3.8% Medicare tax on certain investment income. Penalty exceptions may apply.
We would love to chat with you about the best option for you! Give our office a call today to schedule an appointment.
This is meant for educational purposes only. It should not be considered investment, tax or legal advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professionals regarding your personal situation prior to making any financial related decisions.