Stay or Roll? Comparing Your Retirement Distribution Options header image

Stay or Roll? Comparing Your Retirement Distribution Options

If you’re like many Americans, most of your retirement “nest egg” is in your employer’s retirement plan.

When your life circumstances change — you change jobs, move, or retire — you’re faced with what may be the most important financial decision of your life: what to do with the money you’ve accumulated in your employer’s plan.

You may have more options for what to do with that money than you realize — keep your money in the plan, roll it to a new employer’s plan, take a distribution, or roll it to an IRA. To help you with your decision, we have identified several factors below for you to discuss with your financial advisor, as well as your legal and tax advisors.

The following areas compare the differences between an Employer’s Plan and an Individual Retirement Account (IRA).

Factor 1: Investment options

Employer’s Plan:

  • Your employer selects a menu of investment options and is held accountable to following a prudent process in the selection of available investment options.
  • May be trustee-directed (i.e., your employer chooses your investments and allocations) and/or self-directed (i.e., you choose your investments and allocations).
  • Some employer plans may allow insurance products.

 IRA:

  • A wide variety of investment options to select from, including options that may be unavailable in employer-sponsored plans.
  • Self-directed – you choose your investments and allocations.
  • Life insurance products are not permitted.

Factor 2: Services

Employer’s Plan:

  • You may have access to planning tools, help lines, educational materials, and workshops.
  • Employer plans may offer a loan feature (typically only for active employees).

IRA:

  • You may have access to personalized investment and planning guidance.
  • Loans are not allowed in IRAs.

Factor 4: Tax consequences

Employer’s Plan:

  • Generally, distributions are subject to a mandatory 20% federal1 tax withholding unless you directly roll the assets to another tax-qualified account.

IRA:

  • Distributions are generally subject to a 10% federal1 tax withholding; however, you may elect not to withhold.

Factor 5: Penalty-free withdrawals

Employer’s Plan:

A 10% IRS early withdrawal penalty will apply unless you are:

  • At least age 59½
  • Leaving the company in or after the calendar year in which you reach age 55
  • Disabled
  • Taking substantially equal periodic payments
  • Paying certain medical expenses for yourself, your spouse, or your dependents in excess of 10% of your AGI
  • Subject to a Qualified Domestic Relations Order (QDRO)
  • Deceased
  • Other exceptions may apply

IRA:

A 10% IRS early withdrawal penalty will apply unless you are:

  • At least age 59½
  • Disabled
  • Taking substantially equal periodic payments
  • Making a first-time home purchase (up to $10,000)
  • Paying certain medical expenses for yourself, your spouse, or your dependents in excess of 10% of your AGI
  • Paying health insurance premiums while unemployed
  • Paying certain higher education expenses
  • Deceased
  • Other exceptions may apply

Factor 6: Creditor protection

Employer’s Plan:

  • Generally, qualified plan2 assets are protected from creditors.

IRA:

  • IRA assets are generally protected from bankruptcy only, assuming Federal exemption may be relied upon.
  • State law will determine creditor protection outside of bankruptcy.

Factor 7: Required Minimum Distributions (RMDs)

Employer’s Plan:

  • Generally, you must begin taking RMDs from an employer plan by April 1 of the year following the year you attain age 70½ or by April 1 of the year after you retire (whichever is later).3

IRA:

  • Traditional IRAs: you must begin taking RMDs by April 1 of the year following the year you attain age 70 ½.
  • Roth IRAs: RMDs are not required until a non-spouse beneficiary inherits the assets.

Factor 8: Employer stock

Employer’s Plan:

  • If employer securities are distributed in-kind, capital gains tax on the Net Unrealized Appreciation (NUA) is deferred until you sell the shares.

  • NUA is taxed at the long-term capital gains rate, which is currently lower than the income tax rate for most individuals.

IRA:

  • When you roll over employer stock into an IRA, you are no longer eligible for NUA tax treatment.

Factor 9: Beneficiary planning

Employer’s Plan:

  • Some plans may limit your ability to name multiple or contingent beneficiaries.
  • A spouse beneficiary can roll over plan assets to his or her own IRA, inherited IRA, or employer’s plan.4
  • A non-spouse beneficiary can roll over inherited plan assets to an inherited/beneficiary IRA and can stretch out distributions throughout his or her lifetime.

IRA:

  • IRAs offer flexible beneficiary options, including multiple and contingent beneficiary designations.
  • A spouse beneficiary can roll over plan assets to his or her own IRA, inherited IRA, or employer’s plan.4
  • A non-spouse beneficiary can roll over inherited plan assets to an inherited/beneficiary IRA and can stretch out distributions throughout his or her lifetime.

Contact a Farm Bureau advisor today to discuss your retirement planning and distribution options. Life changes and we’re ready to help you make the best decisions to protect and plan for your future.

Source:
From materials prepared by Broadridge Investor Communication Solutions, Inc.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Neither the Company nor its agents give tax, accounting, or legal advice. Consult your professional advisor in these areas.
1 State tax withholding may apply; consult your tax advisor.
2 Plans covered under Title I of ERISA (e.g., 401(k), pension, and profit-sharing plans)
3 There may be exceptions depending on plan provisions or if you own 5% or more of the company.
4 If rolled to own IRA by a spouse beneficiary, the death distribution waiver no longer applies, and withdrawal from the IRA may be subject to the early withdrawal penalty.

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