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What Are Your Retirement Plan Options When Leaving Your Company May 24

What Are Your Retirement Plan Options When Leaving Your Company


Shane Flait

What options do you have with your company plan when you leave? A 401(k) is a typical company retirement plan, so I\’ll use it to illustrate the options you have with it.

You contributed to your 401(k) through tax deductible contributions and, possibly, some company matching contributions. All earnings are tax-deferred. So your funds will be subjected to income taxation when you withdraw from it.

Three options for handling your 401(k) when you leave your company are:

* Keeping it with that company

* Taking a distribution of your funds, or

* Rolling your 401(k) into another qualified plan…


Here are the pros and cons of each of these options:

-Keeping it with that company

You can simply leave your 401(k) with the company. Doing so keeps it under the investment control of the company though – and you can\’t contribute to it any more if it\’s there.

If there\’s too little in your 401(k) account, the company may force you to take it or it may rolled it into an IRA assigned to you.

One benefit is that assets held within a company plan often have more protection from claims than assets held in accounts controlled by you.

-Taking a distribution of your funds

You can have your funds distributed to you. But that\’ll trigger income taxation for all the funds distributed to you in that year. That can be a lot of taxation – especially if the distribution is added to that year\’s working income. And IRS rules require your company to withhold 20% of your distribution for tax purposes.

If you\’re under 591/2, you\’ll also have to pay a 10% penalty tax in addition to the income tax on the distribution. Wow, that makes it heavily taxed! But if you\’re laid off, there\’s no penalty tax if you\’re 55 or older.

-Rolling your 401(k) into another qualified plan

Lastly, you can rollover your 401(k) into another qualified plan. This could be your IRA or the tax-deferred retirement plan of another company you\’re working for – or going to shortly.

Both these types of rollovers can be tax-free; but you have to request your company to do a direct rollover to them

If you choose to roll it over into an IRA, you should create a new IRA specifically for holding the 401(k) distribution – and nothing else. Such a specially set-up IRA for holding company rollovers allows federal asset protection rules to cover its full amount no matter how much it is.

-What about Roth plans?

Rolling your tax-deferred company plan into a Roth IRA will subject the rollover to income taxation.

If you\’ve a company Roth 401(k) plan, you can roll that into your Roth IRA tax-free. Interestingly, your Roth IRA has no minimum required distributions, but the Roth 401(k) plan at your company does. So it\’s best to roll it into your own specially set-up Roth IRA to hold that company distribution. And, of course, make sure your company transfers it directly to your designated IRA.

Shane Flait helps you with your financial legal, tax, and retirement goals. Get his FREE report on Managing Your Retirement => his ebook: \’Wise Way to Financial Independence\’ =>

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Category: Real Estate
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