Whether you are starting a new job or moving into retirement, the excitement - and stress - may divert your attention away from tying up loose ends related to your retirement plan at your previous employer. It is essential to understand your distribution options as well as common pitfalls to avoid.
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 rollover IRA.
If you choose to directly transfer your retirement plan monies, the assets will move from the qualified employer plan directly to your rollover IRA.
If you choose a lump sum distribution from your employer-sponsored plan you will have 60 days from the date you receive the funds to deposit them into a rollover IRA. This is called an indirect rollover and it is important to note that the 20% tax withholding will apply to the distribution, so you need to make up the difference before depositing the money to avoid taxes and penalties.
If you are changing jobs, your new employer may allow you to transfer your distribution directly to their retirement plan. A transfer allows you to avoid the mandatory 20% tax withholding and potential early withdrawal penalties, and you will defer income taxes on your assets until you make withdrawals from your new 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.
While the rationale to spend your retirement savings may make sense at the time, the reality is that doing so can leave you with 20-25% less money at retirement. What’s more, distributions will be subject to a federal withholding tax of 20% and, if you withdraw the funds before age 55, you’ll also pay a 10% early distribution penalty*
*Exemptions may apply.
This is being provided as a general source of information and is not intended as investment, financial, or tax advice, nor is it a recommendation of any kind. Please consult your financial and tax advisors about your particular situation.