Your Options for a Retirement Plan Distribution
If you are changing
jobs, retiring or being terminated from a job, it is natural to undergo
stress and anxiety. Usually, these changes are also accompanied by receiving
a distribution from your employer's retirement plan. There are three important
decisions that must be made about these distributions.
1. Do you want to
pay tax on it now or have it remain tax-deferred?
2. Do you want to leave your funds with your prior employer's plan, move
them it to your new employer's plan or transfer them to an IRA?
3. How do you want the money invested?
If you have been a
participant in a plan for a long time and have accumulated a large sum
of money, these decisions can have a very large impact on your financial
future and that of your family. Considering the decisions carefully is
Check with your human
resources or payroll department to learn what your options are and get
professional help if you need it.
Pay taxes or not
While your funds were within the qualified plan, any earnings were tax
deferred. When you receive the distribution, you have 60 days to roll
over your funds to your new employer's plan (if allowed) or into an Individual
Retirement Account. If you don't act within 60 days, your distribution
will be subject to regular income taxes and an additional 10% early withdrawal
penalty tax if your are under the age of 59 ½.
If you don't need
the money immediately, it is usually advisable to maintain the tax deferral
Where to keep your
To maintain tax deferral, the funds must stay in some form of qualified
retirement account. Many retirement plans offer the opportunity to leave
funds in the plan after employment termination. You may also be eligible
to transfer the distribution to a new employer's plan. The third option
is to transfer the funds to an IRA. The choice of where to have your money
should be based on the amount of investment control you wish. An IRA probably
provides the most flexibility, but also forces you to make more decisions.
Costs of administration and asset management should also be considered.
Even if you are currently
unsure of your long-term plans, you may want to have the funds transferred
into an IRA. You can always make withdrawals later if you choose.
Your retirement plan distribution may be the largest single sum of money
you will ever receive. The investment of those funds should be handled
very carefully. Be sure to consider how these funds fit into your overall
financial planning efforts.
Be sure to consider
your time horizon and risk tolerance when making your investment decisions.
If you transfer your distribution to your new employer's retirement plan,
consider the investment options and choose appropriately. If you go the
self-directed IRA route, most institutions offer accounts that enable
you to choose stocks, bonds, mutual funds, money market funds and other
Don't feel that you
have to make all the investment decisions immediately. As long as the
funds are within another qualified plan or IRA, there should be no taxes
due and you can make informed and careful investment choices.
Receiving a lump sum distribution is a major financial event. The choices
you make will affect your financial security for years to come. Be sure
to evaluate all your options, seek guidance if needed and decide wisely.
Your future financial security depends on it.