Keeping Control of Your Retirement Accounts

  • Generally you have four distribution choices for your qualified employer–sponsored retirement plan (QRP) assets.
  • Each has unique features and factors you may want to keep in mind.
  • Understand your options before making any decisions.

Decide which option is right for you

If you’re changing jobs, have been displaced, or retiring, one of the most important decisions you may face is how to handle the money you’ve worked hard to earn. Savings you’ve accumulated in your QRPs, like a 401(k), 403(b), or governmental 457(b), as well as your Individual Retirement Accounts (IRAs), may represent a substantial source of retirement income. Choosing an appropriate strategy for your retirement plan savings can help you minimize taxes and make the most of your savings.

Roll your retirement savings into an IRA

One of the most important decisions you may face is how to handle the money you’ve worked hard to save in your QRPs.

Rolling your money to an IRA allows your assets to continue their tax-advantaged status and growth potential, the same as in your employer’s plan. In addition, an IRA often gives you access to more investment options than are typically available in an employer’s plan as well as investment advice.

Features

  • You generally avoid current income taxes and early distribution penalties.
  • You have the ability to maintain your retirement savings at the same firm as your other financial accounts.
  • Certain circumstances will allow penalty–free IRA distributions before age 59 1/2.
  • Traditional and Roth IRA contributions and earnings are protected from creditors in federal bankruptcy proceedings to a maximum limit of $1,283,025, adjusted periodically for inflation.

Keep in mind

  • IRA fees and expenses are generally higher than those in your QRP.
  • Required Minimum Distributions (RMDs) must be taken from Traditional, SEP and SIMPLE IRAs by April 1 following the year you reach age 70½ to avoid a 50% IRS penalty on any amount not taken.
  • In addition to ordinary income, distributions prior to age 59 1/2 may be subject to a 10% IRS tax penalty, unless an exception applies.
  • IRAs are subject to state creditor laws regarding malpractice, divorce, creditors outside of bankruptcy, or other types of lawsuits.
  • If you own appreciated employer securities, favorable tax treatment of the net unrealized appreciation (NUA) is lost if rolled into an IRA.

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 59½.

Leave your retirement savings in your former employer’s retirement plan

While this approach requires nothing of you in the short term, managing multiple retirement accounts can be cumbersome and confusing in the long run. And, you will continue to be subject to the plan’s rules regarding investment choices, distribution options, and loan availability. If you choose to leave your savings with your former employer, remember to periodically review your investments and carefully track associated account documents and information.

An infographic that says your 401(k), you have choices

Features

  • No immediate action is required of you.
  • Investments keep their tax-advantaged growth potential.
  • You retain the ability to leave your savings in their current investments.
  • You avoid the 10% IRS tax penalty on distributions from the plan if you leave the company in the year you turn age 55 or older (age 50 or older for certain public safety employees).
  • Generally, QRPs have bankruptcy and creditor protection under the Employee Retirement Income Security Act (ERISA).
  • Employer securities (company stock) in your plan may have increased in value. The difference between the price you paid (cost basis) and the stock’s increased price is NUA. 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.
  • Fees and expenses are generally lower in a QRP and you will have access to those investments. Please contact your plan administrator for details.
  • Investment options are chosen by the QRP sponsor and you must choose from those options.
  • Additional contributions are typically not allowed.
  • RMDs from your former employer’s plan begin by April 1 following the year you reach age 70½, and annually thereafter, to avoid a 50% IRS tax penalty on any amount not taken.

Move the assets directly into your new employer’s retirement plan

If you’re joining a new company, moving your retirement savings directly into your new employer’s plan may be appropriate if you’d like to keep your retirement savings together, and if you’re satisfied with your new plan’s features and investment choices. Check with your new plan administrator to determine if this option is available.

Features

  • Investments retain their tax advantaged growth potential
  • Fees and expenses are generally lower in a QRP and you will have access to those investments. Please contact your plan administrator for details.
  • RMDs may be deferred beyond age 70 1/2 if the plan allows, you are still employed and not a 5% or more owner of the company.
  • Generally, QRPs have bankruptcy and creditor protection under ERISA.
  • You avoid the 10% IRS tax penalty on distributions from the plan, if you leave the company in the year you turn age 55 or older (age 50 or older for certain public safety employees).

Keep in mind

  • There may be a waiting period for enrolling in new employer’s plan.
  • Investment options are chosen by the QRP sponsor and you choose from those options.
  • In addition to ordinary income tax, distributions prior to age 59 1/2 may be subject to a 10% IRS tax penalty.
  • If you own appreciated employer securities, favorable tax treatment of the NUA is lost if employer securities are moved into another retirement plan or IRA.

Take a lump-sum distribution (taxes and penalties may apply)

Taking a lump-sum distribution can be costly.

You should carefully consider all of the financial consequences before distributing your QRP savings in either cash and/or securities. The impact will vary depending on your age and tax situation. If you absolutely must access the money, you may want to consider withdrawing only what you need until you can find other sources of cash.

Features

  • 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.1

Taking a lump-sum distribution can be costly

Taking a lump-sum distribution can be costlyFor illustrative purposes only. Assumes a 28% federal tax bracket and 5% state and local tax rate. Taxes may vary. The QRP is required to withhold a mandatory 20% federal income tax; you may owe more or less than the 20% depending on your tax bracket. The 10% IRS tax penalty may be assessed if participant is under age 5912 and no penalty exception applies. State penalty may also apply.

Next steps

  • Learn about your choices before taking a distribution.
  • Pay special attention to penalties and fees associated with each possible action.
  • Contact your financial advisor and other professionals if you have questions about how to proceed with the QRP distribution option you selected.

1 Large lump-sum distributions may be taxed at a higher rate than smaller distributions and potentially affect your ability to qualify for other deductions and tax credits for that tax year.

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.

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