Your First Retirement Plan Distribution When Changing Jobs
If you have participated
in a company retirement plan like a 401(k) plan and change jobs, you will
probably receive a distribution of the funds you have accumulated in your
plan. The distributions are often called lump sum distributions. If you
have participated for several years, the distribution could be quite substantial.
Over the course of your working career, you may receive several lump sum
distributions and what you do with those funds and how you handle the
distribution is important.
While you may be tempted
to just take the money and spend it, remember that there would be income
taxes and probably an additional tax penalty. After all, the funds are
for your retirement. By avoiding that temptation you have the opportunity
to build your wealth and take a large step forward on your path to a financially
Options for a Retirement Plan Distribution
Before you officially leave the company, you will probably meet with someone
from your Human Resources department to finalize the details of your termination.
This will probably include discussing a final paycheck, determining any
unused vacation or sick days and your options for taking a distribution
of your retirement plan account. It can take 30 to 90 days to finalize
the distribution, but there are decisions you must make at that time and
when you finally receive the distribution check.
- Do you want to
pay tax on the distribution now or have it remain tax-deferred?
- 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?
- 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
critical. Be sure you fully understand your options 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.
Unless you absolutely
need the money immediately, it is usually advisable to maintain the tax
deferral status. When you receive the distribution check and if you plan
to move it into an IRA or your new employer's plan, make sure you do that
quickly. If you do not get it deposited within 60 days, you will owe tax
on it and a 10% penalty.
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 have received. The investment of those funds should be handled very
carefully. Be sure to consider how these funds fit into your overall financial
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.