Retirement Distributions
DEAR TRUST OFFICER:
I’m going to be retiring later this year. My employer gave me some information from the IRS about my choices for my 401(k) money, but frankly I find the legalese hard to understand. Can you simplify this for me?—MUDDLED ABOUT CHOICES
DEAR MUDDLED:
Don’t feel bad about your confusion, you are in good company. The IRS-provided notices have been criticized for being overly complicated, so much so that Congress ordered the GAO to study the issue. The GAO reported in May that its survey of over 1,000 401(k) participants revealed that only 20% of them knew their four choices for a plan distribution, and 40% did not understand the tax consequences of the choices. The report is at https://www.gao.gov/assets/gao-24-107167.pdf.
Congress was trying to be helpful when it provided so many alternatives, but that doesn’t make decision easy or obvious. Your choices are:
- Leave the money in your employer’s plan.
- Roll the money into the plan of your new employer.
- Roll the money into an IRA.
- Take the money as a taxable lump sum distribution.
On this question, one size definitely does not fit all. What are your retirement income sources? Will your income taxes be going down in retirement? Are you satisfied with the investment options in your employer’s plan? Do you have debts that should be paid off before retirement? How will you invest the money after the distribution?
The decision about how to handle a major retirement distribution will lay the foundation for a successful and secure retirement. We strongly recommend getting professional advice before proceeding—we will be happy to be of service in this regard.
Do you have a question concerning wealth management or trusts? Send your inquiry to contact us.
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