Generally you have four distribution choices for your qualified employer–sponsored retirement plan (QRP) assets, including 401(k), 403(b) and 457 plans. Each plan has unique features and factors to keep in mind. By working with Gruver Wealth Management of Wells Fargo Advisors, we can help educate you so you know all of your options before making a decision.
Decide which option is right for you
If you’re changing jobs or retiring, you’ll need to decide what to do with assets in your 401(k) or other qualified employer-sponsored retirement plan (QRP). These savings can represent a significant portion of your retirement income, so it’s important you carefully evaluate all of the options.
Generally, you have four options:
- Roll the assets to an Individual Retirement Account (IRA)
- Leave the funds in your former employer’s retirement plan (if allowed)
- Move savings to your new employer’s plan (if allowed)
- Withdraw or “distribute” the money
Roll the assets to an IRA
Rolling your retirement savings to an IRA provides the following features:
- Assets continue their tax-advantaged status and growth potential
- You can continue to make annual contributions, if eligible
- An IRA often gives you more investment options than are typically available in an employer’s plan
- You also may have access to investment advice
Before rolling your assets to an IRA consider the following:
- IRA fees and expenses are generally higher than those in your employer’s retirement plan
- Loans from an IRA are prohibited
- In addition to ordinary income, distributions prior to age 59 1/2 may be subject to a 10% IRS tax penalty
- IRAs are subject to state creditor laws
- If you own appreciated employer securities, favorable tax treatment of the net unrealized appreciation (NUA) is lost if rolled into an IRA
Leave the funds with your former employer
You may be able to leave your retirement plan savings in your former employer’s plan, assuming the plan allows and you are satisfied with the investment options. You will continue to be subject to the plan’s rules regarding investment choices, distribution options, and loan availability.
Keeping assets in the plan features:
- Investments keep their tax-advantaged growth potential
- You retain the ability to leave your savings in their current investments
- You may avoid the 10% IRS early distribution penalty on withdrawals from the plan if you leave the company in the year you turn 55 or older (age 50 or older for certain public safety employees)
- Generally, have bankruptcy and creditor protection
- Favorable tax treatment may be available for appreciated employer securities owned in the plan
Keep in mind:
- Your employer may not allow you to keep your assets in the plan.
- You generally are allowed to repay an outstanding loan within a short period of time.
- Additional contributions are typically not allowed.
- You must maintain a relationship with your former employer, possibly for decades.
- In addition to ordinary income tax, distributions prior to age 59½ may be subject to the 10% additional tax.
- RMDs from your former employer’s plan begin April 1 following the year you reach 72, and continue annually thereafter.
- RMDs must be taken from each QRP including designated Roth accounts; aggregation is not allowed.
- Not all employer-sponsored plans have bankruptcy and creditor protection under ERISA.
Move savings to your new employer’s plan
If you’re joining a new company, moving your retirement savings to your new employer’s plan may make sense. This may be appropriate if:
- You want to keep your retirement savings in one account
- You’re satisfied with the investment choices offered by your new employer’s plan
This alternative shares many of the same advantages and considerations of leaving your money with your former employer. In addition, there may be a waiting period for enrolling in your new employer’s plan. Investment options are chosen by the QRP sponsor and you must choose from those options.
Withdraw or “distribute” the money
Carefully consider all of the financial consequences before cashing out. The impact will vary depending on your age and tax situation. Distributions prior to age 59 1/2 may be subject to both ordinary income taxes and a 10% IRS tax penalty. If you must access the money, consider withdrawing only what you need until you can find other sources of cash.
- You have immediate access to your retirement savings and can use however you wish.
- Although distributions from the plan are subject to ordinary income taxes, penalty-free distributions can be taken if you turn:
- Age 55 or older in the year you leave your company.
- Age 50 or older in the year you stop working as a public safety employee (certain local, state or federal) — such as a police officer, firefighter, emergency medical technician, or air traffic controller — and are taking distributions from a governmental defined benefit pension or governmental defined contribution plan. Check with the plan administrator to see if you are eligible.
- If you own employer securities, a distribution may qualify for the favorable tax treatment of NUA.
Keep in mind
- Your former employer is required to withhold 20% of your distribution for federal taxes.
- Distribution may be subject to federal, state and local taxes unless rolled over to an IRA or another employer plan within 60 days.
- Your investments lose their tax-advantaged growth potential.
- Your retirement may be delayed, or the amount you’ll have to live on later may be reduced.
- Depending on your financial situation, you may be able to access a portion of your funds while keeping the remainder saved in a retirement account. This can help lower your tax liability while continuing to help you save for your retirement. Ask your plan administrator if partial distributions are allowed.
- If you leave your company before the year you turn 55 (or age 50 for public service employees), you may owe a 10% IRS tax penalty on the distribution.
What to consider if you own company stock
Net unrealized appreciation (NUA) is defined as the difference between the value at distribution of the employer security in your plan and the stock’s cost basis. The cost basis is the original purchase price paid within the plan. Assuming the security has increased in value, the difference is NUA. NUA of employer securities received as part of an eligible lump-sum distribution from an employer retirement plan qualifies for special tax treatment. In most cases, NUA will be available only for lump-sum distributions — partial distributions do not qualify.
We can help educate you so you can decide which option makes the most sense for your specific situation.
- Get your FREE “Options for Your Retirement Plan Savings Guide” by clicking HERE
- Learn about your choices before taking a distribution
- Pay special attention to taxes, penalties and fees associated with each action
- Contact us or your tax professional if you have questions about
When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty free distributions are available, treatment of employer stock, when required minimum distributions begin, protection of assets from creditors, and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets. Withdrawals are subject to ordinary income tax and may be subject to a federal 10% penalty if taken prior to age 59 1/2.
Wells Fargo Advisors does not provide tax or legal advice. Please consult with your tax and legal advisors to determine how this information may impact your own situation.