Keeping Control of Your Retirement Accounts

  • Generally you have four distribution choices for your employer–sponsored plan.
  • Each has unique advantages and factors you may want to keep in mind.
  • Know all of your options before choosing to withdraw funds from a retirement account.

Decide which option is right for you

If you’re changing jobs or retiring, one of the most important decisions you may face is how to handle the money you’ve worked hard to earn and save in your employer-sponsored retirement plans, like a 401(k). When leaving a company, you generally have four options for your 401(k) plan.

Each of these options has advantages and disadvantages and the one that is best depends on your individual circumstances. You should consider features such as investment choices, fees and expenses, and services offered.

Your Financial Advisor can help educate you regarding your choices so you can decide which one makes the most sense for your specific situation.

Before you make a decision, read the information provided in this piece to become more informed and speak with your current retirement plan administrator and tax professional before taking any action.

Roll over your retirement savings into an Individual Retirement Account (IRA)

One of the most important decisions you may face is how to handle the money you’ve worked hard to save in your employer-sponsored retirement plans.

If you’re changing jobs or retiring, rolling over to an Individual Retirement Account (IRA) may be a way to get more flexibility in how you manage your savings. IRAs are another type of retirement account which offer many of the same tax advantages as a 401(k). There are two main types: Traditional IRAs and Roth IRAs.

You decide how you want to manage your investments with an IRA. You may use an online account where you can choose investments on your own or you might work with a professional who can help you choose investments.

Advantages

  • Investments retain their tax–favored growth potential.
  • You have access to a variety of investment choices, which allows better diversification.
  • You gain the ability to maintain your retirement savings along with 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 million, adjusted periodically for inflation.

Keep in mind

  • IRA fees and expenses are generally higher than those in your employer’s retirement plan.
  • Required Minimum Distributions (RMDs) must be taken from Traditional IRAs by April 1 following the year you reach age 70 1/2 to avoid an IRS penalty.
  • In addition to ordinary income, withdrawals prior to age 59 1/2 are subject to an IRS 10% early–distribution 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 net unrealized appreciation (NUA) is lost if rolled into an IRA.

Wells Fargo Advisors offers IRAs along with a variety of ways to manage your savings.

Note: If you choose this option, you’ll want to research which IRA would be best for your situation and if you would like to open an IRA online or with a Financial Advisor. You would then start the process of rolling your employer plan over to your new IRA, periodically reviewing your investments, and take RMDs from your Traditional IRA (once you reach age 70 1/2).

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

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

With this option, you don’t need to make an immediate decision about where to move your savings. Your money continues its tax-favored growth potential until you choose to withdraw it. Your account will remain subject to your former employer’s plan rules, including investment choices, withdrawal options, and loan availability.

Advantages

  • No immediate action is required of you.
  • Investments keep their tax-favored growth potential.
  • You retain the ability to leave your savings in their current investments.
  • Future withdrawals may avoid the 10% IRS early-distribution penalty if you separate from service in the year you turn age 55 or older.
  • Generally, employer–sponsored retirement plans 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

  • This option is not available to everyone (eligibility is determined by the former plan).
  • Savings left with various employers can create account maintenance complexities.
  • The former employer’s plan will determine:
    • When and how you access your retirement savings.
    • Which investment options are available to you.
  • Additional contributions are not allowed.
  • Required Minimum Distributions (RMDs) must be taken by April 1 following the year you reach age 70 1/2 to avoid the IRS penalty.
  • Withdrawals prior to age 59 1/2 may be subject to an IRS 10% early-distribution penalty and will be taxed as ordinary income.

If you choose this option, remember to periodically review your investments. You’ll need to carefully track associated paperwork and take RMDs (once you reach age 70 1/2) from each of your retirement accounts.

Move your retirement savings 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 maintains your money’s tax-favored growth potential. This option 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 employer to determine if this is available to you. Some retirement plans don’t allow this option.

Advantages

  • Investments retain their tax-favored growth potential.
  • Retirement savings are kept in one account.
  • Required Minimum Distributions (RMDs) may be delayed beyond age 70 1/2 if you’re still working for that company, are not a 5% or more owner of the company and the plan allows.
  • Generally, employer-sponsored retirement plans have bankruptcy and creditor protection under the Employee Retirement Income Security Act (ERISA).
  • You avoid the 10% IRS tax penalty 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

  • This option is not available to everyone (eligibility is determined by the new employer’s plan).
  • There may be a waiting period for enrolling in new employer’s plan.
  • The new employer’s plan will determine:
    • When and how you access your retirement savings.
    • Which investment options are available to you.
    • What assets you can transfer from your previous employer’s plan.
  • Withdrawals prior to age 59 1/2 may be subject to an IRS 10% early-distribution penalty and will be taxed as ordinary income.
  • Favorable tax treatment of appreciated employer securities is lost if they are moved into another retirement plan.

Note: If you choose this option, make sure your new employer will accept a transfer from your old plan. Contact the new plan provider to get the process started. Also, remember to periodically review your investments and track associated paperwork. You’ll need to take RMDs from each of your retirement accounts (once you reach age 70 1/2). There are no RMDs from employer retirement plans for those still working at a firm, assuming you are not a 5% or more owner of the company and the plan allows you to delay RMDs until you retire.

Withdraw your money as cash

While withdrawing all of your money at once may sound attractive, consider the financial consequences.

While the option of withdrawing all your money at once may sound attractive at first, carefully consider the financial consequences before making such a decision. The money you withdraw will be taxable, and as such, subject to a mandatory 20% federal tax withholding. In addition, the money is also subject to a potential early-distribution penalty.

Advantages

  • Retirement savings are immediately available.
  • 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 plans. Check with plan administrator to see if you are eligible.
  • Cash can be used however you wish.
  • Lump-sum distribution of appreciated employer securities may qualify for the favorable tax treatment of NUA.

Keep in mind

  • Mandatory 20% federal tax withholding is automatically deducted from the taxable amount you withdraw.
  • 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.

If you leave your company before the year you turn 55 (or age 50 for public service employees), you may owe a 10% IRS penalty on the distribution.1

Note: If you must choose this option, you may want to consider withdrawing only a portion of your savings, while keeping the remainder saved in a tax-favored account, such as an IRA. This can help reduce your tax liability, while potentially growing some of your savings for retirement at the same time.

Taking cash can be costly

Here’s an example of what may be left of a $20,000 balance if you withdraw your money as cash:
Current Balance $20,000
10% IRS early–distribution penalty* - $2,000
Regular federal income tax - $5,600
State and local income taxes - $1,000
Total savings reduced to: $11,400

*May be assessed if you are under age 59 1/2, and no penalty exception applies. State penalty may also apply.

For illustrative purposes only. Assumes a 28% federal tax bracket and 5% state and local tax rate. Taxes may vary. Depending on your tax bracket, the taxes owed at the end of the year may be higher or lower.

It may take a few weeks to receive your final check in the mail once requested. Remember, your final check amount will reflect the 20% automatic withholding for federal taxes and any gains or losses due to market fluctuation.

You’ll want to consider how you’ll cover any additional federal taxes due, along with state taxes and the possible 10% IRS early-distribution penalty when filing your tax return for the year.

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 professional if you have questions about how to proceed.

1Large 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. 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 59 1/2.

Wells Fargo & Company and its affiliates do 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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