Keeping Control of Your Retirement Accounts
If you’re changing jobs, have been displaced, or are 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 qualified employer-sponsored retirement plan (QRP), like a 401(k), 403(b), or governmental 457(b), may represent a substantial source of retirement income. Choosing an appropriate strategy can help you minimize taxes and make the most of your savings.
You generally have four options for your QRP distribution:
- Roll over your assets into an Individual Retirement Account (IRA)
- Leave your assets in your former employer’s QRP, if the plan allows
- Move your assets directly to your new employer’s QRP, if the plan allows
- Take your money out and pay the associated taxes
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 Wells Fargo Advisors 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 on to become more informed and speak with your retirement plan administrator and tax professional.
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 earn.
Rolling your money directly into 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.
- You generally avoid current income taxes, including a 10% additional tax on early distributions for those younger than 59½ when rolling over to an IRA.
- You can maintain your retirement savings at the same firm as your other financial accounts.
- Other exceptions to the 10% additional tax for distributions taken from the IRA before age 59½ including higher education and first-time homebuyer.
- Traditional and Roth IRA contributions and earnings are protected from creditors in federal bankruptcy proceedings up to a maximum of $1,283,025, adjusted periodically for inflation.
Keep in mind
- IRA fees and expenses are generally higher than those in a 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% excise tax on every dollar under-distributed.
- Distributions are subject to ordinary income on any before-tax amount and, if taken prior to age 59½, may be subject to a 10% additional tax, 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 hold shares of your employer’s stock (company stock) in your QRP and those shares have increased in value since you purchased them, the difference between the price you paid (cost basis) and the stock’s price is called the net unrealized appreciation (NUA). You lose the ability to take advantage of favorable tax treatment of the NUA if you roll the shares into an IRA.
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 at different financial institutions and with former employers can be cumbersome and confusing in the long run. And you will continue to be subject to the rules of each QRP regarding investment choices, distribution options, and loan availability.
- No immediate action is required.
- Investments keep their tax-advantaged growth potential.
- You can typically keep your current investments and continue to have access to them. Please contact your plan administrator for details.
- QRP fees and expenses are generally lower than in an IRA.
- You avoid a 10% additional tax on distributions from the plan if you leave the employer 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).
- Favorable tax treatment may be available if you have appreciated employer securities in the plan.
Keep in mind
- Your employer may not allow you to keep your assets in the plan.
- You generally are allowed to repay an outstanding loan within a short period of time.
- Additional contributions are typically not allowed.
- You must maintain a relationship with your former employer, possibly for decades.
- Distributions taken prior to age 59½ may be subject to a 10% additional tax as well as ordinary income tax.
- You must begin taking RMDs by April 1 following the year you reach age 70½, and annually thereafter, to avoid a 50% excise tax on every dollar under-distributed.
- RMDs must be taken from each QRP, including designated Roth accounts. This means you cannot aggregate your RMDs from multiple QRPs and take the distribution from only one account. If you have money in, for example, five QRPs, you will need to calculate and take RMDs annually from each one of them.
- Not all QRPs have bankruptcy and creditor protection under ERISA.
- You should periodically review your investments and carefully track associated account documents and information.
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 QRP may be an option. This may be appropriate if you want to keep your retirement savings in one account and you’re satisfied with the investment choices the new plan offers. This alternative shares many of the features and considerations of leaving your money with your former employer.
- Investments keep their tax-advantaged growth potential.
- Fees and expenses are generally lower with a QRP versus an IRA.
- You avoid the 10% additional tax 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).
- RMDs may be deferred beyond age 70½ 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.
- Loans may be allowed.
Keep in mind
- There may be a waiting period for enrolling in the new employer’s plan.
- Investment options for the plan are chosen by the QRP sponsor and you choose from those options.
- You can transfer or roll over only the QRP assets that your new employer permits. Please contact your plan administrator for details.
- Your new employer will determine when and how you can take distributions from the QRP.
- Distributions prior to age 59½ may be subject to a 10% additional tax as well as ordinary income tax.
- If you own appreciated employer securities, favorable tax treatment of the appreciated employer securities is lost if employer securities are moved to another QRP.
Take a lump-sum distribution (taxes and penalties may apply)
You should carefully consider all of the financial consequences before distributing your QRP savings. The impact will depend on your age and tax situation. If you absolutely must access the money, consider withdrawing only what you need until you can find other sources of cash.
- You have immediate access to your retirement savings and can use them however you wish.
Keep in mind
Although distributions from the plan are subject to ordinary income taxes, penalty-free distributions can be taken with no 10% additional tax 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, or emergency medical technician—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.
- A lump-sum distribution may qualify for favorable tax treatment of any NUA of your former employer’s company stock.
- Your funds lose their tax-advantaged growth potential.
- Distribution may be subject to federal, state, and local taxes unless rolled over to an IRA or QRP within 60 days.
- If you leave your company before the year you turn 55 (or age 50 for public service employees), you may owe a 10% additional tax on the distribution.
- Your former employer is required to withhold 20% of your distribution for federal taxes.
- 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.
- 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 select.
Wells Fargo Advisors does not provide tax or legal advice. Please consult with your tax and legal advisors before taking any action that may have tax or legal consequences and to determine how this information may impact your own situation.