Career Transitions
Distribution options from your retirement plan
Options for your assets
If you have changed jobs, been offered a pension buy-out, retired, or are getting ready to retire, you have an opportunity to make a decision 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:
Leave assets in your former employer’s plan
Transfer the distribution directly to your new employer’s plan
Directly transfer or rollover your distribution into an IRA
Keep/spend the distribution from the qualified employer 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.
If permitted, you can transfer your distribution directly to your new employer’s retirement plan. A transfer allows you to avoid the mandatory 20% tax withholding and potential early withdrawal penalties on distributions, and you will defer income taxes on your assets until you make withdrawals from your new employer’s plan.
Directly transferring your distribution to an IRA allows you to avoid the mandatory 20% tax withholding and potential early withdrawal penalties, and you will defer income taxes on the distribution until you make withdrawals from the IRA. If you choose to rollover the distribution into an IRA, you will receive a lump sum and deposit it into a rollover IRA account.
If you choose to keep or spend your distribution, 20% of the taxable portion will be withheld immediately and paid to the IRS at the time of withdrawal. 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.
This is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
