Retirement Plan Distribution Options
When you retire or change jobs, you have an important decision to make. You may be entitled to a distribution from your employer’s retirement plan. You may wonder what options are available to you and whether you should:
- Leave your retirement assets in your former employer's retirement plan
- Rollover your investments into your new employer's plan (if you are changing jobs)
- Rollover your investments into an IRA
Each decision has serious implications and making the wrong decision or making a mistake could cause you or your beneficiaries to have to pay taxes unexpectedly and potentially deplete a large portion of your retirement accumulations. Here is just one example of how mistakes can be made when you change jobs. Assume that George, a participant in a previous employer’s 401k plan, has recently changed jobs. George made the decision to rollover his investments in his old employer's plan to an IRA he opened over the Internet. Unbeknownst to George, he mistakenly opened a non IRA account to receive all of the investments from his old employer's plan. Although a check made payable to the new custodian was deposited into the new account, George did not know that he transferred his retirement assets into a non IRA account until he received a 1099-INT, which was long after the 60-day rollover period.
Assume that for the purposes of this hypothetical example, George transferred $650,000 from his old employer’s 401k plan to the non IRA account. This is a substantial amount that could have taken George over 15 or 20 years to accumulate. This one mistake could result in over $200,000 in federal and state income taxes plus a 10% penalty if under age 59½ unless he was able to receive a waiver of the 60-day rollover requirement.
According to section 402(a)(1) of the Internal Revenue Code, except as otherwise provided, any amount actually distributed to a distributee by an employers trust shall be taxable. Code section 403(2)(c)(b) provides that the 60-day requirement to transfer a distribution may be waived where the failure to waive would be against equity or good conscience, including casualty, disaster or other such event beyond the reasonable control of the individual subject to the requirement.
Revenue procedure 2003-16, 2003-4 I.R.B. 359 provides that in determining whether to grant a waiver of the 60-day rollover requirement, pursuant to code section 403(2)(c)(b), the Internal Revenue Service will consider all relevant facts and circumstances including 1) errors committed by a financial institution; 2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; 3) the use of the amount distributed (for instance, with payment by check, if the check was cashed) and; 4) the time elapsed since the distribution occurred.
George requested a private letter ruling and, based on the facts in his case, he did not present any evidence as to how any of the factors described above precluded him from effectuating the rollover of his retirement funds within the 60-day period.
You should understand that the rules and the tax laws change over time and that the Internal Revenue Service frequently issues letter rulings in response to an individual taxpayer’s request. A letter ruling is directed only to the taxpayer who requested it and may not be cited or relied upon in another case.
This example illustrates how important it is for you to know the rules when you receive an eligible retirement plan distribution. The key to making the right decision is information about the potential advantages and disadvantages of each option.
Bill Griffith, Jr., CFP®,
is principal of W.E.
Griffith & Associates, LLC,
a wealth management firm near Pittsburgh, Pennsylvania. He has been
providing specialized strategies and services for ensuring long-term
financial independence and security for many years. He has written
numerous articles about various topics relevant to personal finance,
retirement and investment planning and is author of the books Securing
a Retirement Income for Life
and More
Money for Retirement Right Now.
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