Changing jobs or retiring? Do not forget your retirement savings!

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An employer-sponsored retirement plan may offer choices for what to do with your account balance in the plan when you decide to change jobs or retire. This may include amounts you have contributed, the vested portion of any amounts your employer has contributed, plus any earnings on those contributions.
You will want to think carefully before making any decisions about withdrawing the money in your retirement savings plan account, as some choices may entail greater tax liability than others depending on your circumstances. You should consult your legal and/or tax advisors before making any financial decisions.

A look at some of your choices

Generally, you have three options for managing your account balance in your employer's retirement plan when you change jobs or retire:
1. Keep Your Money in the Plan:
  • Generally available if your account balance is more than $5,000 when you terminate employment. If your account balance is not more than $5,000 when you terminate employment, consult the terms of the plan to determine the options available to you.
  • Continue to enjoy tax-deferred compounding of any investment earnings
  • Continue to receive regular account statements and performance reports
  • While new contributions are not allowed, you will still have control over how your money is invested among the plan's investment options
  • Required minimum distributions must begin once you reach age 73Footnote 1
If you are retiring, you might choose this option if your spouse is still working or if you have other sources of retirement income. If you're starting your own business when you leave your current job, keeping your retirement money in your former employer's plan may help protect your retirement assets from creditors, should your new venture run into unforeseen trouble.
2. Move Your Money to Another Retirement Account:
  • You can move your money into another qualified retirement account, such as an IRA, or, if you're changing jobs, your new employer's retirement savings plan, if the plan accepts direct rollovers
  • With a "direct rollover," the money goes directly from your former employer's retirement plan to the IRA or new employer's retirement savings plan, and you never touch your money. With this method, you continue to defer taxes on the full amount of your plan account balanceFootnote 2
3. Take a Cash Distribution:
  • Have your plan account balance distributed to you in one lump sum, or in installments of a fixed amount over a set number of years, depending on your plan's provisions
  • Choosing to take part or all of your plan account balance when you retire or change jobs in a cash distribution is subject to a mandatory federal income tax withholding of 20%
  • Individuals under age 59½ (55 in some circumstances) could also be liable for a 10% additional federal tax on early withdrawal, in addition to state taxes
To avoid paying taxes and potentially incurring early withdrawal additional taxes on a cash distribution consider redepositing your money within 60 days of distribution to an IRA or your new employer's qualified plan (an indirect "rollover"). In this case you'd have to make up the 20% federal income tax withholding from your own pocket, but any excess federal income taxes withheld would be refunded when you file your regular income tax return.

The potential cost of a cash distribution

Distribution – 20% Federal Income Tax WithholdingFootnote 3 = Amount in your pocketFootnote 4
$10,000 – $2,000 $8,000

Consider potential tax consequences

  • If you're retiring, and opt for a lump-sum distribution and do not complete an indirect rollover, you will want to determine if there are any favorable tax rules that apply to your distribution based on your personal circumstances, such as the net unrealized appreciation strategy or 10-year forward income averaging if you were born before January 2, 1936 (including the minimum distribution allowance)
  • To qualify as a lump-sum distribution that may be eligible for special tax treatment depending on your circumstances, you must receive all the assets in all of your retirement plan accounts with a company (including 401(k), profit sharing, and stock purchase plans) within a one-year period
There may be other distribution options available. Contact your plan administrator for information on all options available under your employer's retirement plan. Then be sure to consult a qualified legal and/or tax professional to ensure that your planning decisions coincide with your personal financial situation.

Footnote 1 Effective January 1, 2023, the required beginning date for RMDs is April 1 of the year after you turn age 73. You are required to take an RMD by December 31 each year after that. If you delay your first RMD until April 1 in the year after you turn 73, you will be required to take two RMDs in that year. You may be subject to additional taxes if RMDs are missed. Please consult your tax advisor regarding your specific situation.

Footnote 2 Fees and investment expenses may be higher in an IRA than in an employer-sponsored plan. Rolling over employer stock from a retirement plan to an IRA may end up ultimately causing higher taxes on any potential gains on that stock. Also, if you continue to work for the business sponsoring the plan and you do not own more than 5% of the business, the plan may allow you to delay taking distributions from the employer-sponsored retirement savings plan until the year you retire. However, you'll still need to start RMDs from all traditional IRAs according to the normal schedule. (There are no RMDs for Roth IRAs for the original account owner.)

Footnote 3 The federal income tax rate applied to the distribution would be your actual marginal income tax rate plus any additional federal taxes. State taxes may also be due. State tax laws vary. Consult your tax advisor.

Footnote 4 If you don't complete an indirect rollover within 60 days of the distribution, then you will need to determine whether additional income taxes beyond the 20% federal income tax withheld by your employer are due. You generally have until your tax filing deadline to pay these taxes. Consult your legal and/or tax advisor for more information.

You have choices about what to do with your employer-sponsored retirement plan accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over an employer-sponsored plan from your old job to your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment (particularly with reference to employer stock), and different types of protection from creditors and legal judgments. These are complex choices and should be considered with care. For more information visit our rollover page or call Merrill at 888.637.3343.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
The example presented is hypothetical and does not reflect specific strategies developed for actual clients. It is for illustrative purposes only.

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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

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