818 Route 202-206, Bridgewater, NJ 08807
Telephone 908-722-6868, Toll Free: 1-800-392-0980, Fax: 1-908-722-2827, E-Mail: info@forefin.com
Retirement Plan Distributions - Job Change,
Relocation, Retirement
After five, ten or fifteen years, you have decided to leave your company. No matter why you're leaving , you're entitled to get any money you paid into your employer's 401(k) or 403(b) plan. Unless you're vested, you forgo any money your employer contributed to your account. Vesting usually takes five years. So, if you've been diligently saving in a 401(k) and you're only months from being vested, consider waiting a bit before calling it quits. You could end up with 50% more cash that way.
Whatever you do, don't cashout your 401(k) or 403(b)- roll it over into a tax-deferred Individual Retirement Account (IRA). Consider the consequences of rolling over your money into your new employer's 401(k), where it will be stuck so long as you work there. No matter how great the new plan's funds and features, you will not get the flexibility afforded by an IRA, where you are in control. Consider this, five years down the road, your company president hooks up with a good mutual fund salesman, and the next thing you know, your company 401(k) is parked in another mutual fund until you switch jobs or retire.
If you withdraw money before age 59 1/2, you'll pay an immediate 10% penalty plus income taxes on the amount which isn't rolled directly into an IRA. If you want to keep deferring taxes and to maintain control over your money, you can transfer your money directly from the plan into a rollover IRA. (In some instances you might be able to leave the money in your current employer's plan or roll it over into your new employer's plan.)
Why Timing Is Critical
Unless you invest the money directly into a rollover
IRA, or leave it in the plan, your employer is required to
automatically withhold 20% of your distribution to help cover
taxes on what you do receive. Failure to avoid withholding could
be costly. If you're due $100,000, the withholding requirement
means you would only receive a check for $80,000. The option
that's best for you depends on your circumstances.
If you want some or all of the money
now...
it'll cost you. First, 20% will be withheld against
federal income taxes on whatever you take out. So right away
you'll have lost one-fifth of those retirement assets. When you
file your taxes for the year in which you take the distribution
you'll probably need to pay the IRS a check to cover any
remaining income tax liability on the distribution. Typically,
that'll be another 10% or so. And if you're not at least 59 1/2,
or disabled, or leaving your job after the age of 55, you're
subject to an additional 10% federal tax as a "premature
withdrawal penalty" (unless you make regular withdrawals in
substantially equal amounts over your life expectancy).
Retirement plan distributions must meet these requirements to be eligible for any averaging treatment. They must come from a pension or profit sharing plan that's considered "qualified" by the Internal Revenue Service. A "qualified" plan is one that meets the numerous, specific, and sometimes complex technical requirements spelled out in the Internal Revenue Code. Check with your employer to be sure about yours. They must be paid because you've left your job (if you are not self-employed), been disabled (if you are self-employed), reached age 59 1/2 or died. Distributions from plans that were terminated by the employer are not eligible unless you've reached 59 1/2. These can be rolled into an IRA or taken in cash -- but if taken in cash, no special tax treatment is available
The full distribution must be paid to you within one calendar year. You must have participated in your company's retirement plan for five years or more. Forward averaging cannot be used on any portion of a distribution which represents your own after-tax contributions. But it can be used on the earnings from those distributions. One last thing about forward averaging: You can use it only once in your lifetime. If there's a chance you might receive another lump-sum distribution in the future, you should consider whether you want to use that forward-averaging option now.
If you want to defer all taxes...
You must either have your retirement plan money
transferred directly into a "rollover IRA" or leave it
in your current employer's plan (if that's possible). If you keep
your money in your employer's plan, you might be subject to
maintenance fees. Remember, you must decide before you leave your
job or retire. If you don't, your employer will send 20% of your
money directly to Uncle Sam and write you a check for the
remainder. A rollover IRA is a special IRA which is separate from
any regular IRA you might have, but which can grow on the same
tax-deferred basis. Just like in a regular IRA, no taxes are paid
until you begin taking money out. So you have more money working
for you than you would have in a regular, taxable investment --
and therefore more opportunity for your earnings to compound and
your nest egg to grow. Among the most popular choices for IRA
investments are mutual funds which are a professionally managed
pool of money from many investors. It can own stocks or bonds or
money market instruments. This provides most investors far more
diversification than they could achieve on their own. Many mutual
funds belong to "families" of funds, which can include
various types of stock funds, bond funds, and money market funds,
and give investors the right to switch all or part of their money
from one type of fund to another. Of course, one of the critical
things to look at in a mutual fund, as with any other kind of
investment, is its historical track record. Since an IRA is a
long-term investment, you want a fund family that has achieved
consistently superior long-term results. As with all investments,
past performance is not an indicative of future returns. If you
open a rollover IRA and later move on to a new employer who
offers a qualified retirement plan, you can generally take your
money out of the IRA and put it in your new employer's plan (if
the plan allows you to). There's no tax and no penalty, as long
as you complete the process within 60 days of taking money from
the IRA. This would make it possible for you to use forward
averaging when you retire or leave that job, provided you
participate in the new plan for at least five years. In an
employer's plan you may have more freedom to withdraw money
penalty-free before age 59 1/2 than you do in an IRA.
For additional information on your insurance needs or information about our Financial Services, call 1-800-392-0980, complete the inquiry request form, or simply E-Mail us at: info@forefin.com.
|