IRA and 401(k) Rollovers

Although 30 percent of workers expect their employer-sponsored retirement plan to supply most of their retirement income, only 7 percent of retirees say this is actually the case. Why the disparity? Perhaps most people don't understand that how they handle a retirement plan distribution can seriously affect the size or longevity of their portfolio.

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Your 401(k) approach - all at once or IRA - type

The best way to handle your 401(k) depends on your financial situation and retirement goals. Here are a few options to consider.

  • Check, please — Taking all the money at once, called a lump-sum distribution, can give you ready cash to buy a retirement home, start a business, or go on a spending spree. But remember, in addition to the usual tax implications, the IRS requires employers to withhold 20 percent of the account balance for income taxes.
  • Play it safe — Some plans will let you take your distribution as a series of monthly payments (an annuity). These payments will be based on your accumulated balance and your life expectancy. You may be able to choose a single-life annuity or a joint and survivor annuity. If you choose a single-life annuity, payments are based on your life expectancy and continue for your lifetime. If you live longer than expected, the payments continue anyway. If you elect a joint and survivor annuity, you receive a smaller monthly benefit, but the payments continue over the lifetimes of you and your spouse.

Rolling 401(k) into an IRA is most popular

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IRA rollover — About 90 percent of retirees transfer 401(k) assets to an IRA, which can offer continued tax deferral and a wider variety of investment options.4 With an IRA, you withdraw funds as needed and pay income taxes only on withdrawals.

Stay put — Happy with your current plan? You might be able to leave your money where it is. Be aware, however, that doing so could limit your ability to borrow against the balance or add to it. You will also be responsible for keeping track of your account if your former company merges and moves.

Deciding how to 'retire' your 401(k) calls for careful study and consideration --and fully understanding the pros and cons of each option may require some additional expertise. By taking the time to determine the best plan of action, you can help ensure the kind of retirement you've envisioned.

Remember that distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10 percent federal tax penalty.