- Income Tax Considerations
- Beware–the 10% Early Withdrawal Penalty Tax
- Rollover into a Traditional IRA or Other Retirement Plan
- Conduit IRAs
- Summary of Distribution Options When You Leave Your Company
Don't jump the gun by taking a distribution of your 401(k) money before you look at all your options and make an informed decision. To summarize, you have the following options if you want to roll over your distribution:
- You may have the option to leave the money in your old employer's 401(k) plan.
- Directly roll over your 401(k) money into your new employer's 401(k) plan or other retirement plan, assuming the new plan will allow you to do so right away.
- Directly roll over your 401(k) money into a conduit IRA until your new employer's 401(k) plan or other qualified plan will accept the money (necessary for plan participants born before 1936 to preserve capital gain and averaging treatment).
- Directly roll over your 401(k) money into a traditional IRA and continue to fund your retirement. This is advisable if you do not have access to a 401(k) or other qualified plan in your new job, or you want to manage your own retirement assets. Also, the IRA money is available for withdrawal without the need to satisfy an employer's hardship criteria, and penalty-free withdrawals are available for qualified education expenses and qualified first-time homebuyers.
- Directly roll over your 401(k) money into a traditional IRA and convert it to a Roth IRA unless you file as married filing separately.
IMPORTANT NOTE: See the section Roth IRA Conversions to learn about Roth IRA conversions that may be available to you even if you do not meet the criteria for a Roth IRA.
Distributions over Your Life Expectancy
Another way to avoid the 10% early withdrawal penalty tax on a distribution from a 401(k) plan upon leaving the company is to take the distribution over your life expectancy. You must take a series of substantially equal periodic payments at least once a year over your life expectancy or the joint lives of you and your beneficiary. Of course, you will pay ordinary income tax on the distributions you receive each year. The withdrawal schedule must continue at least five years, and at least until you reach age 59½. This option should only be considered when you really need the money or are close to retirement. Otherwise, you'll be depleting your retirement savings before retirement.
IMPORTANT NOTE: Not all 401(k) plans allow this type of distribution option. Check with your plan administrator.
SUGGESTION: Another way to avoid the 10% penalty tax is to directly roll over your 401(k) distribution to a traditional IRA and then take distributions over your life expectancy. Consider setting up more than one IRA and take distributions from only one of them to keep you from depleting all your retirement savings.