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Changing Jobs or Retiring? Don’t Forget Your Retirement
Savings!

Key Points

» What Is a Distribution?
» Some Distribution Options
» A Look at Some of Your Choices
» Retirees Should Consider Tax Consequences
» Withholding on Cash Payments
» The Potential Cost of a Cash Distribution
» Points to remember

Your retirement savings plan offers you several choices when you
decide to change jobs or when you retire. This report explains some
of the options you may be able to choose from in deciding how you
want the money in your plan treated when one of these events
occurs.

What Is a Distribution? 

A distribution is simply defined as a payout of the amount of money
that has accumulated in your retirement savings plan. This may
include amounts you have contributed, the “vested” portion of any
amounts your employer has contributed, plus any earnings on those
contributions.

You will want to think carefully before making any decisions about
the money in your retirement plan, as some choices may mean you
have to pay more in income taxes on your distribution. It’s
also a good idea to talk with a tax advisor before picking a
distribution election.

Some Distribution
Options
Keep Money in Employer’s Plan Allows continued tax-deferral of any growth.
Make a Direct Rollover Allows continued contributions and tax-deferral of any growth.
Avoids potential taxes and penalty fees.
Take a Cash Distribution Satisfies immediate need for cash. Substantial taxes and
penalty fees may apply.

A Look at Some of Your Choices 

You may be able to leave your money in the plan; move it to another
retirement savings account, such as an IRA, or another
employer’s retirement savings plan if you’re changing
jobs; or take a cash distribution.

  • Keep Your Money in the Plan: You can leave your savings
    in your employer’s retirement savings plan if your account
    balance was more than $5,000 at any time, depending on your
    plan’s rules. Minimum distributions must begin after you reach
    age 70 ½, however. You’ll continue to enjoy
    tax-deferred compounding of any investment earnings and receive
    regular financial account statements and performance reports.
    Although you will no longer be allowed to contribute to the plan,
    you will still have control over how your money is invested among
    the plan’s investment options. You also may still be able to
    obtain information from the professionals who manage and administer
    your account.

    When retiring, you might choose this option if your spouse is
    still working or if you have other sources of retirement income
    (such as taxable investment income). If you’re starting your
    own business when you leave the company, keeping your retirement
    money in your former company’s plan may help protect your
    retirement assets from creditors, should your new venture run into
    unforeseen trouble.

    Example: Sue, 58, is retiring from her full-time job. Her
    husband is retiring and the family receives his pension and Social
    Security benefits, which will cover most of their current living
    expenses. Sue plans to work part-time at her church after
    “retirement” and does not expect to need her retirement savings for
    several more years. After consulting with a tax advisor, Sue
    decided that keeping her money in the company’s retirement
    plan at least until she turns age 59 ½ will provide her with
    the greatest flexibility in the future.

  • Move Your Money to Another Retirement Account: You can
    move your money into another qualified retirement account, such as
    an Individual Retirement Account (IRA), or, if you’re changing
    jobs, your new employer’s retirement savings plan. With a
    “direct rollover,” the money goes directly from your former
    employer’s retirement plan to the IRA or new plan, and you
    never touch your money. With this method, you continue to defer
    taxes on the full amount of your plan savings.

    Example: Bill is taking a new job at a different company.
    He elects to roll over balances from his existing plan into an IRA
    rather than transfer his assets into his new employer’s 401(k)
    plan. This provides Bill with a much broader choice of investment
    options.

  • Take a Cash Distribution: You can choose to have your
    money paid to you in one lump sum, or in installments of a fixed
    amount or over a set number of years, depending on your plan’s
    provisions. However, you may have to pay taxes on a cash
    distribution and, if you’re under age 55 at the time when you
    leave your job, you may also have to pay a 10% penalty for early
    withdrawal.

Retirees Should Consider Tax Consequences 

If you’re retiring, you will want to take into consideration
whether favorable tax rules apply to your lump-sum distribution. To
qualify as a lump-sum distribution, you must receive all the
amounts you have in all your retirement plans with a company
(including 401(k), profit-sharing, and stock-purchase plans) within
a one-year period.

Potentially favorable tax rules that may apply to a lump-sum
distribution include the minimum distribution allowance and 10-year
forward income averaging if you were born before 1937.

Ten-year forward income averaging: The taxable part of the
distribution is taxed at special rates based on levels for single
taxpayers in 1986.

Example: Ron, born in 1936, is retiring in three months. He
met with a financial advisor to determine which distribution method
would result in the greatest benefit after taxes. His advisor
showed him that, under some assumptions about inflation and future
rates of return, his best course would be to take a lump-sum
distribution and use 10-year forward income averaging. Under other
assumptions, he would benefit from leaving his money in the company
plan or rolling it over directly into an IRA. There may be other
distribution options available. Contact your plan administrator for
information on all options available under your plan.

Withholding on Cash Payments 

If you choose to physically receive part or all of your money (say,
$10,000) when you retire or change jobs, this action is considered
a cash distribution from your former employer’s retirement
account. The cash payment is subject to a mandatory tax withholding
of 20%, which the old company must pay to the IRS, and possibly a
10% penalty if you are under age 55 at the time you left the
company.

You can avoid paying taxes and any penalties on a cash distribution
if you redeposit your retirement plan money within 60 days to an
IRA or your new employer’s qualified plan. However,
you’ll have to make up the 20% withholding from your own
pocket in order to avoid taxes and any penalties on that amount.
The 20% withholding will be recognized as taxes paid when you file
your regular income tax at year end, and any excess amount will be
refunded to you as an IRS refund.

The Potential Cost of a
Cash Distribution
Distribution – 20% Tax Withholding = Amount in Your Pocket – 10% Penalty1
$10,000 distribution – $2,000 Tax Withholding = $8,000 in Your Pocket – $1,000 Penalty

If you are under age 55 when you separate from service with your
employer, and choose to take a cash distribution, be aware of how
it can immediately whittle away the money you’ve worked so
hard to save. You can take a cash distribution and avoid the 10%
penalty so long as you roll over the entire $10,000 within 60 days
into an IRA or your new employer’s qualified plan, even though
you actually received only $8,000 after paying the 20% tax
withholding. In that case, $2,000 will have to come out of your
pocket.

As with all retirement and tax planning matters, be sure to consult
a qualified tax and financial planning professional to ensure that
your planning decisions coincide with your financial goals.

Points to Remember 

  1. A distribution is a payout of realized savings and earnings
    from a retirement plan. In general, you must begin taking
    distributions from your account by April 1 of the year following
    the year in which you turn 70 ½, unless you are still
    working for your employer.
  2. Your distribution options include keeping your money in your
    plan; enacting a direct rollover; or taking a cash
    distribution.
  3. If you keep your money in your plan you will no longer be able
    to make contributions, but you still maintain control over the
    investments and any growth continues to be tax deferred.
  4. In a direct rollover, you have your money moved directly to a
    qualified plan or IRA without physically receiving a cent. If you
    are under age 55 at the time of separation from service, a direct
    rollover may be a good option, as it avoids the hefty taxes and
    penalties associated with a cash distribution.
  5. Although a cash distribution is perhaps the most enticing
    option available, consider that you must pay taxes on the money you
    receive at then-current rates. And if you are under age 55 when you
    leave your employer, you may have to pay Uncle Sam 10% of your
    savings in penalties.

1Additional taxes may be due, depending upon
individual’s tax bracket.

© 2010 Standard & Poor’s Financial Communications. All
rights reserved.