Featured Post

Recent Posts

Employer-Sponsored Retirement Plan Distributions

Website Blog Banner Size (1280 × 300 px) (7)

Distribution is commonly used to describe a withdrawal from an employer-sponsored retirement plan. When you have funds in a plan maintained by your current or former employer, it is essential to understand your distribution options for several reasons.

First, you may not have access to all available options. Your distribution options may vary based on the type of employer-sponsored plan, the plan's specific provisions, the type of contributions (employer, employee, pre-tax, Roth, after-tax, etc.), and whether or not the employer still employs you at the time of the distribution.

Second, your choices may have different tax consequences for you; one may result in immediate taxation or taxation at a higher rate, whereas another may permit your retirement funds to continue to grow tax-deferred.

Third, your payout options may determine the longevity of your retirement plan's assets. The amount and timing of your distributions must be handled with extreme caution when dealing with retirement funds. One or more poor decisions now could have significant consequences for your retirement in the future.

Lastly, your beneficiaries may experience different payouts and tax consequences based on your decisions. If providing for your beneficiaries and minimizing their taxes is one of your primary objectives, this can be an essential consideration.

Caution: the tax laws governing employer-sponsored retirement plan distributions are complex. Consult a tax expert for assistance.

Warning: Special rules apply to distributions to qualified individuals affected by certain natural disasters and to qualified reservists.

When can distributions be made from a retirement plan?

In general, you can withdraw funds from your retirement plan upon the occurrence of certain events. For instance, you may be eligible to receive distributions upon retirement or upon reaching the plan's average retirement age. You may be eligible for distribution in the event of job loss, disability, plan termination, or financial hardship.

Depending on the type of retirement plan and the plan's provisions, you may be eligible to receive certain distributions while you are still employed and after you have left your job. However, some plans may only permit withdrawals after employment termination.

Caution: taxable distributions made before age 5912 may be subject to the 10% federal premature distribution tax unless an exception applies. An important exception applies to distributions you receive due to employment termination if your separation from service occurs in or after the calendar year you turn 55. (age 50 for qualified public safety employees participating in particular state or federal governmental plans).

Caution: The penalty for early withdrawals from SIMPLE IRAs during the first two years of plan participation is 25%.

Note: The penalty tax did not apply to coronavirus-related distributions of up to $100,000 to an individual in 2020. A coronavirus-related distribution is made in 2020 to a person who has been diagnosed with coronavirus or whose spouse or dependent has been diagnosed with coronavirus, as well as a person who experiences adverse financial consequences due to factors related to the coronavirus pandemic. These factors may include quarantines, furloughs, the inability to work due to a lack of child care, and closing businesses.

Required Minimum Distributions - When You Must Begin Taking Distributions

Generally, required minimum distributions for defined contribution plans (other than Section 457 plans for tax-exempt organizations) and IRAs have been suspended for 2020. The waiver includes 2019 distributions with a required beginning date of April 1, 2020, not taken in 2019.

You cannot leave money in an employer-sponsored retirement plan forever. The federal government requires you to withdraw annual minimum distributions (RMDs) based on your life expectancy. The required beginning date for taking your first distribution from a qualified retirement plan is typically April 1 of the calendar year following the calendar year in which you reach age 7012 (age 72 if you reach age 7012 after 2019).

There is one circumstance where your required start date can be later than described previously. If you work beyond age 7012 (age 72 if you reach age 7012 after 2019), your required beginning date as a plan participant under the plan of your current employer can be as late as April 1 of the calendar year following the calendar year in which you retire if both of the following conditions are met:


  • In this manner, your employer's retirement plan allows you to delay your required beginning date.
  • You (the plan participant) own less than 5% of your employer's stock.

Example(s): You own more than 5% of your employer's business and continue to work there. The date of your 70th birthday was December 2, 2018. This indicates that you will turn 70 and 12 in 2019. Therefore, you must withdraw your first RMD from your retirement plan by April 1, 2020, even if you are still employed. However, if your RMD is waived for 2020, you will not be required to take one until December 31, 2021.

You have funds in two retirement plans, one with your current employer and one with a previous employer. You own less than five percent of each company. Your 70th birthday was on December 2, 2018 (and you will turn 70.5 on June 2, 2019); however, you will continue to work until your 73rd birthday on December 2, 2021. You can postpone your first RMD from your current employer's plan until April 1, 2022 — the April 1 following your retirement year. However, you must take your first distribution from your former employer's plan by April 1 of the year following the year you reached age 7012 or April 1, 2020. However, if your RMD is waived for 2020, you will not be required to take one until December 31, 2021. Regardless of the required start date, subsequent distributions are due each year on or before December 31st.

Caution: If you delay your first required distribution (as described above), you must take both your first and second required distributions in 2020. However, if your RMD is waived for 2020, you will not be required to take one until December 31, 2021.

When Your Plan Must Provide Distributions

Although you may choose to delay distributions from your retirement plan until age 70 1/2 (age 72 if you attain age 70 1/2 after 2019) or later, your plan must make distributions available on a different schedule. A plan must permit distributions no later than 60 days after the latest of the following:


  • At the plan year's end, the employer no longer employs you.
  • At the end of the plan year, you attain age 65 (or the average retirement age for the plan, whichever is earlier).
  • The end of the plan year in which your 10th anniversary of plan membership occurs

A plan year may or may not coincide with the calendar year. Check with your plan's administrator to determine the plan year.

The typical age of retirement is the earlier of:


  • The age your plan specifies as the typical retirement age
  • The date you reach age 65 or the fifth anniversary of your participation in the plan, whichever occurs later.


Distributions are typically made once you reach age 65 or leave the employer's employment. It depends on the format of the plan document. The plan may even offer benefits for early retirement.

Options for Distribution While Still Employed by the Plan Sponsor ("in-service" Distributions)

Depending on the type of retirement plan and the plan's provisions, one or more of the following distribution options may be available to you. In contrast, the plan's administrator still employs you. Plans vary in the distribution options available to employees. You may need to review the plan's summary plan description or speak with the plan administrator to determine the specifics of your employer's plan.

Plan Loans

If the plan permits loans, you may be able to borrow against your vested benefits in your employer's retirement plan. The loan will not be considered a taxable distribution if it complies with IRS regulations. Most plan loans must be repaid within five years of the funds being borrowed (the repayment period can be longer if the funds are used to purchase a primary residence). The interest rate on plan loans is generally very reasonable compared to other loans.

Uneven Distribution

Some plans permit hardship withdrawals while the participant still works for the employer. If your plan permits this withdrawal, you must demonstrate financial hardship to justify the withdrawal. Generally, hardship withdrawals are subject to income tax and, if you're under age 59 1/2, a 10% premature distribution tax.

Caution: 401(k) plans typically permit withdrawals for financial hardship. However, if the hardship withdrawal occurs in 2018 or earlier, your plan participation may be suspended for six months or more. This may cause you to lose employer-matched contributions for the affected period. Similar regulations govern 403(b) plans.

Caution: hardship withdrawals cannot generally be rolled into an IRA or other employer-sponsored retirement plan.

Profit-sharing Strategies

Some profit-sharing plans [including 401(k) plans] permit you to withdraw employer contributions (e.g., matching contributions or discretionary profit-sharing contributions) after a predetermined period.

At age 59 1/2, 401(k) and 403(b) plans also permit you to withdraw your own elective deferrals (pre-tax and Roth).

Retirement Plans

Generally, defined benefit and money purchase pension plans do not permit distributions until employment termination or the average retirement age.

The Pension Protection Act of 2006 encourages "phased retirement" programs by allowing the distribution of pension benefits to 62-year-old employees who have not yet separated from service or reached the plan's average retirement age.

Annuities as a Standard Form of Pension Benefit

A defined benefit pension plan and a money purchase pension plan must provide a specified type of annuity retirement benefit. In certain instances, profit-sharing and stock bonus plans must also adhere to these rules.

A plan with defined benefits typically provides benefits in the form of periodic payments for life. Those who participate in a defined benefit plan may have limited options. A defined benefit plan must provide married participants with a qualified joint and survivor annuity (QJSA) as a starting point. Remember that you are not obligated to accept this annuity form of benefit; you and your spouse may choose to change this default form of a payout. In this instance, your plan will specify alternative payout options, such as a single-life annuity.


Married Individuals

Generally, if you and your spouse have been married for at least a year before the annuity begins, these pension plans must offer you both a QJSA. A QJSA provides an annuity during retirement for as long as you or your spouse are alive. The annuity is for your lifetime, with a survivor annuity for your spouse. The annuity for your spouse's life cannot be less than fifty percent (or greater than one hundred percent) of the annuity payable while you and your spouse are alive.

You may opt out of the QJSA if your spouse provides written consent. You can then select an alternative payout option permitted by the plan. For instance, you may be able to select an annuity based solely on your lifetime. The monthly benefit of a single-life annuity is greater than that of a joint-life annuity because the same amount of money is designed to last for only one life rather than two. If your spouse outlives you, the annuity payments will cease upon your passing. With a single-life annuity, your spouse will no longer receive pension payments upon death. Consider using a portion of the single-life annuity payments to purchase life insurance on your life to protect your spouse after your passing (if you are insurable at an affordable cost). This option is typically described as "maximizing your pension with life insurance."

Single Persons

If you are unmarried, these pension plans are typically required to offer you a single-life annuity payout option. You may, however, generally opt out of the single-life annuity and select an alternative form of payout permitted by the plan. Consult your plan administrator regarding your distribution options as a single individual.

Distribution Options Upon Termination of Employment, Retirement, or Disability

After leaving your employer, whether voluntarily or involuntarily, due to separation from service (voluntary or involuntary), retirement, or disability, you may have up to four options for withdrawing funds from your retirement plan.

In general, a plan cannot require you to withdraw funds from your account until you reach the average retirement age of the plan.

A plan may, however, "cash out" your benefit without your permission if its value is $5,000 or less. (Generally, if the distribution exceeds $1,000, it must be paid to an IRA established on your behalf unless you choose to receive the payment in cash or roll it over into a different IRA or employer retirement plan.)

Rollover

A rollover is a direct or indirect tax-free transfer of assets from a retirement plan to another plan (at a new employer) or an IRA. If you cannot roll over your funds directly to another plan, you can typically roll over your funds to an IRA and then, if you choose, to a new employer's plan. Rollovers promote retirement savings by allowing your funds to grow tax-deferred in your IRA or new plan. With an indirect rollover, the administrator of your previous plan must withhold 20% of the distribution for federal income tax. (The amount withheld can be claimed as a credit on your federal income tax return.)

Warning: Required minimum distributions, periodic payments, and hardship distributions cannot generally be rolled into an IRA or employer-sponsored retirement plan. Consult with a tax expert.

Explicit Distribution

A lump-sum distribution withdraws your entire retirement plan balance in one tax year. The income tax consequences of a large lump-sum distribution are frequently significant, and you may be required to pay the 10% premature distribution tax if you are younger than 5912 years old (and perhaps a state penalty, too). In addition, after you receive a lump-sum distribution, your plan funds are no longer held in a tax-deferred account. A lump-sum distribution is typically not favored unless you have urgent financial needs and no other options. (Special tax-averaging and capital gains provisions that may make a lump-sum distribution less taxing if you were born before 1936 may be an option if you received your pension before that year. Consult with a qualified expert.)

A significant exception to the 10% premature distribution tax applies to distributions from qualified retirement plans after you separate from service with the employer maintaining the plan during or after the calendar year you attain age 55. (age 50 for certain distributions to qualified public safety employees).

Periodic Payments

You may be eligible to receive periodic payments from your employer-sponsored retirement plan in the form of an annuity, installment payments, or payments distributed over your expected lifespan. Several alternatives have already been described (see Defined benefit plans — annuities as a standard benefit form). Consult with your plan administrator to determine the exact types of annuities and periodic payments permitted by your plan.

Distributions with Discretion

Deductible distribution is any retirement plan withdrawal, not a lump sum, loan, or annuity payout. It may be structured (withdrawals are made at predetermined intervals) or unstructured (you withdraw what you need as needed). Not all plans offer this choice. The benefit is that you only withdraw what you need, allowing the remainder to grow tax-deferred. In general, however, these distributions are subject to income tax and the 10% premature distribution tax if you are under age 5912 (unless an exception applies).

Please add the following disclosures: 

Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken before age 59 1/2, may be subject to a 10% federal tax penalty.

RMDs are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation if you would like to schedule a meeting with one of our advisors. [Click Here]

Disclosure: The material is considered reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing is accurate or complete. This information is not a full summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. The investments mentioned may not be suitable for all investors. The material is general. Past performance may not be indicative of future results. Raymond James Financial Services, Inc. does not provide advice on tax, legal, or mortgage issues. These matters should be discussed with the appropriate professional.


UntitledddewqeLynch Retirement Investment Group
2016, 2017, 2018, and 2019
forbes 2021John M. Lynch, CIMA®, CPWA®
                       
John M. Lynch, CIMA®, CPWA® Managing Director – LRIG, Financial Advisor
RJFS
, of Lynch Retirement Investment Group, LLC.
Was named on the 2021 Forbes Best-In-State Wealth Advisor List.

5fa66049-d24d-4fff-9d4b-177e5c407924

John M. Lynch, CIMA®, CPWA®
Managing Director – LRIG,
Financial Advisor – RJFS

Untitled design (14)

Andrew Fentress, CFP®
Financial Advisor

Untitled design (13)-1

Adam Tobin, CFP®, CRPC
Customer Relationship Manager

 

Find a time that best fits your schedule.



Barron's "Top 1,200 Financial Advisors," March 2022. Barron's is a registered trademark of Dow Jones & Company, L.P. All rights reserved. The rankings are based on data provided by 6,186 individual advisors and their firms and include qualitative and quantitative criteria. Factors included in the rankings: assets under management, revenue produced for the firm, regulatory record, quality of practice, and philanthropic work. Investment performance is not an explicit component because not all advisors have audited results and because performance figures often are influenced more by a client's risk tolerance than by an advisor's investment picking abilities. The ranking may not be representative of any one client's experience, is not an endorsement, and is not indicative of the advisor's future performance. Neither Raymond James nor any of its Financial Advisors pay a fee in exchange for this award/rating. Barron's is not affiliated with Raymond James. The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research, is based on an algorithm of qualitative criteria, mostly gained through telephone and in-person due diligence interviews, and quantitative data. Those advisors that are considered have a minimum of seven years of experience, and the algorithm weights factors like revenue trends, assets under management, compliance records, industry experience, and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criterion due to varying client objectives and a lack of audited data. Out of approximately 32,725 nominations, more than 5,000 advisors received the award. This ranking is not indicative of an advisor's future performance, is not an endorsement, and may not be representative of (individual clients' experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. Raymond James is not affiliated with Forbes or Shook Research, LLC. Please visit https://www.forbes.com/best-in-state-wealth-advisors for more info.

Your Comments :

Schedule-A-Meeting-sidebar

Categories

Read more of what you like.