Choosing Best Way To Manage Your 401(k) Distributions

OCEAN CITY — Although you may not be planning to change jobs anytime soon, when you do retire or make a change, it’s important to understand the choices you have for your 401(k) distributions. It’s important to make the most of the assets you’ve set aside for the future. Start by considering your choices and their tax consequences.

If permitted by your plan, leaving your account balance in your current plan may make the most sense. If you need more time to decide, you can choose any of the following options.

Roll over your balance to a traditional IRA: Your assets remain tax-deferred and your IRA can potentially grow until you withdraw the assets.  With this plan, you will have more investment flexibility than in most employer plans.

Roll over your balance to a new employer’s plan: Your assets remain tax deferred and you can invest them along with your contributions to the new plan. Your rollover stays tax-deferred until you take a distributions from the new plan.

Convert your balance to a Roth IRA: You can pay current taxes on the rollover amount without a penalty and invest your account. Any future investment earnings are tax-free in a qualified distribution.

Transfer your balance to a qualified annuity: As with a rollover, your transfer amount is tax-deferred. At retirement, you receive taxable payments for your lifetime, which spreads your taxes over the years.

When you take a distribution of pre-tax contributions to a 401(k) plan and any earnings associated with those contributions, the tax-deferred status ends and it’s time to pay the taxes.

The money is taxed as ordinary income in the year you receive it, and you may be subject to a 10% additional federal tax if you take a distribution before age 59½.

If you transfer assets to a qualified annuity, when you begin annuity payments, you’ll need to pay taxes on the payments, spread over the years of the annuity.

If you have an outstanding loan against your retirement savings account, you may be required to repay it when you leave your current employer. If you can’t repay it, it will be considered a distribution, and you will owe income tax on the balance. Contact your company benefits representative to find out the provisions of your employer’s plan.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)