What are my distribution options?
If you would like to take a distribution from your retirement plan, you typically have four options:
Leave the money in the former employer’s plan
Roll over the assets to your new employer’s plan, if one is available and rollovers are permitted
Roll over to an IRA
Cash out the account value
You can also combine these options.
A rollover is when you move the funds from a qualified retirement plan, such as a 401(k), 403(b), 457, or defined benefit plan to another retirement plan or Individual Retirement Account (IRA). A benefit of rolling over your retirement account balance is you typically don’t pay taxes until you withdraw the funds from the new plan or IRA. This means you can continue to save money, tax-deferred. There are several ways you can roll over your account, including the following:
Direct Rollover - A direct rollover is when you ask your plan administrator to disburse funds straight to another retirement plan or an IRA. You can only do a direct rollover if you are eligible. Typically, you must have left the service of the company. A check is made out in the name of the receiving financial institution for your benefit and includes the IRA account number or name of the receiving retirement plan. This check may be sent to you or the financial institution directly. This is known as a trustee-to-trustee transfer, and no taxes are withheld.
Indirect rollover - Another type of rollover is referred to as an indirect rollover. This is when the distribution from the IRA or retirement plan comes directly to you. The check is titled in your name and sent directly to you. With that payment in hand, you then have 60 days to deposit all or some of the money into an IRA or retirement plan. The custodian disbursing this rollover will issue a 1099 for the amount of the withdrawal.
Keep the 60-Day and One-Year Rollover Rules in Mind
60-Day Rule - All this means is that you have 60 days from when you received the retirement funds or to roll it over to an IRA or another plan. There are some situations in which the IRA can waive the deadline if certain circumstances that are out of your control prevent you from making the payment.
One-Year Rollover Rule - There is a “one-year rule” meaning you cannot make more than one indirect rollover in a 12-month period.
If you take an indirect rollover from one IRA, you will have to wait one year until you can take another IRA indirect rollover. If you do another rollover during this period, that rollover is taxable.
Being aware of both the 60-day and one-year rules can help you keep the tax benefits of your plan.
Factors To Consider Between Rolling To A New Employer’s Retirement Plan Versus An Individual Retirement Account (IRA)
The decision to roll over plan assets to an IRA rather than keeping assets in a previous employer’s plan or rolling over to a new employer’s plan should reflect consideration of various factors, the importance of which will depend on an investor’s individual needs and circumstances. Some of the factors include:
Investment Options - An IRA often enables an investor to select from a broader range of investment options than a plan. An investor who is satisfied by the low-cost institutional funds available in some plans may not regard an IRA’s broader array of investments as an important factor.
Fees and Expenses – Retirement plans such as 401(k)s and IRAs typically include investment-related expenses as well as plan or account fees. Investment related expenses may include mutual fund operating expenses, transaction fees, and investment advisory fees. Plan fees typically include some or all the previously mentioned fees plus plan administrative fees (recordkeeping, compliance trustee, investment advisor). An IRAs account fees may include investment related and administrative fees.
Services - An investor may wish to consider the different levels of service available under each option. Some plans provide access to investment advice, planning tools, telephone help lines, educational materials, and workshops. Similarly, IRA providers offer different levels of service, which may include full brokerage service, investment advice, distribution planning and access to securities execution online.
Penalty Free Withdrawals - If an employee leaves her job between age 55 and 59½, she may be able to take penalty-free withdrawals from a plan. In contrast, penalty-free withdrawals generally may not be made from an IRA until age 59½. It also may be easier to borrow from a plan.
Protection from Creditors and Legal Judgments - If an individual is sued or subject to debt collection efforts, creditors do not have the right to attach to qualified plan balances. IRA account balances may not be afforded the same protection. State laws vary in the protection of IRA assets in lawsuits.
Required Minimum Distributions - Once an individual reaches age 72, the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at age 72, however, they generally are not required to make required minimum distributions from their current employer’s plan. This may be advantageous for those who plan to work into their 70s.
Employer Stock - An investor who holds significantly appreciated employer stock in a plan should consider the negative tax consequences of rolling the stock to an IRA. If employer stock is transferred in-kind to an IRA, stock appreciation will be taxed as ordinary income upon distribution. The tax advantages of retaining employer stock in a non-qualified account should be balanced with the possibility that the investor may be excessively concentrated in employer stock. It can be risky to have too much employer stock in one’s retirement account; for some investors, it may be advisable to liquidate the holdings and roll over the value to an IRA, even if it means losing long-term capital gains treatment on the stock’s appreciation.
Loans – If you maintain a loan balance with your retirement plan account, you will have to either pay off the loan with a personal check or a portion of your retirement account balance. If you pay with a portion of your retirement account balance, it will be considered a distribution and considered a taxable event. You will pay ordinary federal and state income tax rates. Furthermore, if you are under 59 ½ years of age, there will be a 10% early withdrawal penalty.
Cashing out the Balance – If you take a distribution, this is a taxable event. You will pay ordinary federal and state income tax rates. Furthermore, if you are under 59 ½ years of age, there will be a 10% early withdrawal penalty.
These are examples of factors that may be relevant when analyzing available options, and the list is not exhaustive. Other considerations also might apply to specific circumstances.