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Rolling Over Your Employer-Sponsored Retirement Plan

For anyone with a retirement plan at a former employer, say, a 401k plan, taking a lump-sum distribution could be costly. If not executed properly, it could lead to a mandatory 20% tax withholding.  

Let’s quickly dive into ways a retirement saver can avoid this (sometimes) unnecessary withholding.

Since 1994, any employee or business owner who takes a distribution from their retirement will get a check from the plan trustee or custodian for their account balance minus a 20% tax payment to the IRS.

However, this mandatory tax withholding can be waived if the employee or business owner does one of the following:

  1. Directs account proceeds into a rollover individual retirement account (IRA)

  2. Leaves money in the employer account (assuming the plan is not terminated)

  3. Sets up installment payments for the recipient's life expectancy (plus the life expectancy of his or her spouse in some instances), which avoids the 10% penalty for early withdrawals but not current income taxes

  4. Transfers the lump sum directly to a new employer's plan, assuming the new employer does not have a waiting period

Action Plan

A common approach for many savers is option #1, a rollover to an IRA. Once complete, investment assets remain available for withdrawal (should the need arise) and could remain eligible to roll into another employer's plan at a later date. Furthermore, this option leaves you (and/or your investment management professional) in charge of actively managing the IRA assets in investment vehicles more consistent with your goals and objectives.

But before you make a financial decision, let’s talk to determine the tax consequences and other important details to ensure everything gets done right the first time.

Schedule a Portfolio Review Today!

Please schedule an appointment to discuss our planning options or send a message with any burning questions.

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