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Maintain tax deferral - One way to maximize the value of your retirement savings is to maintain tax deferral.
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Leave the money in your current plan - If your retirement plan balance is greater than $5,000, (even less in some cases), you may have the option to leave the money right where it is. Your savings will continue to grow tax-deferred. Check with the employee benefits administrator of your current plan to discuss this option.
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Opt for a direct rollover - You may transfer your savings directly into another qualified retirement plan or rollover Individual Retirement Account (IRA). If you choose these options, you won't pay income tax penalties or withholding on your distribution. Your retirement savings will therefore continue to grow tax-deferred until withdrawal.
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If you plan to roll your savings into another qualified plan at a later date, set up an IRA separate from any non-rollover IRAs you may have. If you combine the two, you forfeit the option of a tax-free rollover to a qualified plan in the future.
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Receive regular income, but keep the remainder tax-deferred - This flexible option provides income while maintaining your tax-deferred status on the money that you're not being distributed.
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Receive partial payments on a regular schedule - This is accomplished through rollover IRA or through your current plan. You will pay income tax on any distributions; however, if you're at least 59½, you won't pay a penalty. If you're under 59½ and schedule the distributions correctly, it's possible to avoid withdrawal penalties. Your payment amount will be determined by the value of your savings.
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The larger your balance, the greater your periodic payment. And, no matter how much money you have in your retirement savings, withdrawing bit-by-bit as opposed to receiving a lump sum means the balance of your account will continue to grow tax-deferred. Be sure to schedule your periodic payments so you don't outlive your savings. Remember, too, if you are 70½ or older, you must withdraw a certain amount annually (true for Traditional IRA, but not Roth IRA).
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Take the payout - Unless you're in dire need of the money you've accumulated, this option may not be in your best interest.
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Receive the distribution, then roll it over - If you choose this option, your employer is required to hold 20% of the distribution for possible income tax obligations; you receive 80%. If you decide to roll the 80% into an IRA or employer-sponsored plan within 60 days, it will not be taxed until withdrawal; however, the 20% withheld is taxable income in the eyes of the IRS and may be subject to state and federal income taxes as well as an early withdrawal penalty of 10% if you're under the age of 59½.
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Receive the distribution, then spend or reinvest - The only advantage of this option is the immediate accessibility of your money. Downsides include possible withdrawal penalties as well as state and federal taxes. Even if you reinvest, you still have to pay taxes on the distribution (in some cases, this could exceed 50%), your savings will no longer grow tax-deferred, and earnings on your reinvestment will be taxed each year.
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Something else to remember - For those younger than age 59½, there are some exceptions to the 10% early withdrawal penalty, including substantially equal periodic payments over your life expectancy, certain unreimbursed medical expenses and disability. Contact a qualified tax adviser for additional information.
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