Understanding your distribution options

Retirement can be something to look forward to, but it’s important to make sure you have a plan. Part of planning includes having an income distribution plan so you can to be sure the money you have saved over your working life, will last throughout retirement. There are several options you have with your retirement savings plan when you’re considering leaving an employer or preparing to retire and the potential implications of each. You can:

1. Roll over your money to a new employer plan (if available and if rollovers are permitted).
2. Leave your retirement savings in former employer plan (if permitted).
3. Roll over former employer plan savings to an IRA.
4. Take a lump sum, cash out and pay the required taxes on the distribution.
5. Make an income plan to pay yourself in retirement.¹

When you decide to retire is so important because it can aid you in the decision to keep your savings with your employer and stay put, rollover or cash out. Each has pros and cons and all have financial and tax implications. Knowing what you want and speaking with a financial and tax professional will help you compare which move is best for you. Here are just some of what you can expect:¹

Option #1 – If you decide to roll over assets to a new employer offering a retirement plan, you can:

Advantages:

• Continue saving to maintain tax-deferred status keeping your money working for you.
• Combine other qualified plans or IRA savings into one account.
• Fees in employer group plan may be lower than individual accounts.
• Loan provisions may allow you to borrow from rollover amount.

Disadvantages:

• Roll-ins to new plan may not be allowed or have an eligibility waiting period.
• New employer plan provisions may impact you (e.g., investments, fees, services, providers, etc.).
• May be more restrictive on any withdrawals while employed.
• You may be subjected to plan limitations and distribution provisions upon retirement.

There are two types of rollovers:

1. Indirect rollover:

   You’ll receive funds in your name and within 60 days, you must reinvest and send money to new plan.

2. Direct rollover:

   Plan-to-plan transfer and you never see the money, it goes directly to your new plan.

Which is better? Most professionals will say take a direct rollover. This way you avoid temptation and potential fees, taxes and penalties. You must roll over the full amount to avoid 20% withholding and potential income tax and penalties, which would erode your savings further.

Key takeaway: If you think you want to roll over your account into a new employer plan, be sure to review the new plan features and provisions along with fees and expenses to make sure it makes sense. Then, be sure to speak with a professional about the pros and cons of any move you wish to make.¹

Option #2 – If you decide to keep savings in former employer’s plan:

Advantages:

• Maintain tax-deferred status keeping your money working for you.
• Maintain current investment choices.
• Preserves any ownership of company stock maintaining tax benefits at withdrawal (if any).
• Fees in employer group plan may be lower than individual accounts.

Disadvantages:

• You give up control — changes made to plan by former employer will impact you (e.g., investments, fees, services, providers, etc.).
• You may be subjected to plan limitations and distribution provisions upon retirement.
• You may not be able to take a loan against the balance.
• No new contributions allowed and, if not 100% vested, vesting will cease.

Key takeaway: Ask yourself: You’ve moved on. Will you pay attention to the money left behind? Will you have the time and desire to manage it? Are you willing to lose potential value over time? If the answer is no, consider moving your savings to other options.¹

Option #3 – If you decide to roll over a former employer plan to an IRA, you:

Advantages:

• Can continue saving to maintain tax-deferred status, keeping your money working for you.
• IRA may offer broader investment options beyond typical 401(k) with more control.
• IRAs offer flexibility with unscheduled withdrawals and may help when required minimum distributions (RMDs) at age 72 begin.
• May be able to deduct your contributions to an IRA on your taxes.

Disadvantages:

• Would not have access to plan-specific investment options if important to you.
• No ability to take a loan against an IRA — only access to money is by taking a taxable distribution.
• Investments fees in IRA could be more expensive than a group employer plan.
• IRS penalty-free withdrawals if you are 59½ vs. age 55 with employer plan.

Key takeaway: If you think you want to roll over your account into an IRA, you will get more flexibility and control over your money but as a tradeoff you may lack access to your funds without penalty and potentially higher fees. Be sure to evaluate the pros and cons and talk with a financial professional about what works for your situation.¹

Option #4

If you decide to take a lump sum or cash out, here is what you can expect:

Advantages:

• On the plus side, you’ll have immediate access to a portion of your cash in a lump sum (but remember most will go to taxes and penalties).
• Penalty-free access may be available if you leave your job the year you turn 55.
• May see a tax advantage for any company stock in plan that has appreciated.
• If you made any after-tax contributions in a plan Roth IRA, you may take that amount tax free; however, you may pay capital gains tax on earnings of those contributions.

Disadvantages:

• Cashing out before age 59½ is strongly discouraged due to lost opportunity costs (loss of potential investment earnings), taxes and penalties.
• At time of distribution, you pay 20% on balance for pre-payment of federal taxes.
• You’ll also pay state taxes and an early distribution penalty (ouch!).
• The lump-sum distribution could move you into a higher tax bracket, costing you more.

Key takeaway: The bottom line: unless you are facing a financial crisis, it may be in your best interest to keep your pre-tax earnings invested and working for you. Talk with a professional advisor to find out how to best protect your income while working and when retired, putting a plan in place to protect your savings — or to discuss if cashing out is right for you.¹

Option #5 – Make an income plan to pay yourself in retirement

An income plan can help you manage your retirement savings for life and it:

• Helps transition you from saving to giving yourself a paycheck so you don’t outlive your cash.
• May preserve a portion of your remaining invested cash to keep up with inflation and avoid savings erosion.
• Considers when to apply for Social Security, the later the better for your bottom line.
• Determines which accounts to withdraw from first and how to manage the tax implications.
• Considers how old you are when you retire and navigates the best way forward to draw money down, avoid penalties while considering tax issues.
• Helps you feel more confident knowing you have a plan to ensure you have enough to live the retirement you envisioned — for a better sense of well-being.

Key takeaway: How and when you take your money matters. Make sure you talk with a financial professional to create an income plan so you can preserve your savings and help determine the best distribution option so you can retire well.¹

Required Mandatory Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually as follows:

• Age 73 for an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033
• Age 75 for an individual who attains age 74 after December 31, 2032