401(k) Distribution Education
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A plan participant leaving an employer typically has four options (and may engage in a combination of these options), each choice offering advantages and disadvantages. The options are:
- Leave the money in his/her former employer's plan, if permitted;
- Roll over the assets to his/her new employer's plan, if one is available and rollovers are permitted;
- Roll over to an IRA; or
- Cash out the account value.
A rollover involves the movement of funds from one investment to another. For instance, when a person retires, and individual retirement account may be rolled over into an annuity or other form of pension plan payout system. Balances in Traditional IRAs can be rolled over into Roth IRAs, although income taxes will be due on untaxed earnings in the Traditional IRA account. When a bond or certificate of deposit matures, the funds may be rolled over into another bond or certificate of deposit. A stock may be sold and the proceeds rolled over into the same stock, establishing a different cost basis for the shareholder.
A Lump Sum Distribution can also come from a variety of sources. People retiring from (or leaving) a company, may receive a Lump Sum Distribution of the value of their pension, salary reduction or profit-sharing plan. Beneficiaries of life insurance policies may receive a death benefit in a lump sum.
People receiving lump sum payments from their company's pension, profit-sharing, or salary reduction plan due to retirement or other termination of employment, have a choice to roll over the amount into an IRA investment plan within 60 days. Also, current IRAs may be left at your old employer or possibly transferred to your new employer, or financial institutions within a 60-day period. Through an IRA rollover, the capital continues to accumulate tax-deferred until time of withdrawal. In order to avoid a 20% withholding by the trustee, assets should be rolled over from one place to another as a direct transfer, made by instructing the work place retirement plan trustee to transfer the assets directly to another IRA trustee. Tax-free rollovers may only occur one in a one-year period starting on the date of the first distribution. Otherwise, the distribution amount would be subject to regular income tax and a potential 10% premature distribution penalty. As long as the money is re-deposited within 60 days, there is no tax on the withdrawal, which is considered a tax-free rollover.
NECU offers access to experienced investment representatives can help educate you on the many choices surrounding your financial future. If you're in a position to learn more about the distribution options, we can help educate you on the different options available to you.
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Regarding Northeast Insurances and Investments (IIS)
Northeast Credit Union and Northeast Investment and Insurance Services are not registered broker/dealers and may only discuss and/or transact securities business with residents of the following states: CO, FL, GA, IL, IN, ME, MD, MA, NH, NC, RI, SC, VA, VT, WV
Regarding Northeast Planning Associates (NPA)
Financial planning offered through Northeast Planning Associates, a registered investment adviser. The LPL Financial Registered Representatives at Northeast Planning Associates may only discuss and/or transact securities business with residents of the following states: CA, CO, CT, FL, GA, IL, MA, ME, NH, NJ, NY, PA, SC, TX, VA, VT, WI
Northeast Credit Union, Northeast Insurances and Investments, NPA, and LPL Financial are not affiliated.