Retirement - Question 70

What do you suggest that I do with my 401(k) plan distribution if my job is eliminated through downsizing?

The best option is to retain the tax-deferred status of your retirement plan by opening an IRA rollover account.

Another option is to take personal receipt of your 401(k) plan distribution and arrange to deposit these funds into your IRA. (If you choose to receive the funds directly, your former employer is required to withhold 20% for federal income tax.) You then may roll over the remaining funds (80%) into your IRA. You are required to roll over these funds within 60 days of receipt. When you file your income tax return, you then file for a refund of the 20% of your distribution withheld.

By electing the first option (a direct rollover), you will avoid the mandatory 20% withholding and have your total lump sum distribution fully invested. Approximately 70% of individuals eligible to receive a lump sum distribution because of a change or loss of jobs elect to receive these funds.

The amount received is considered income and taxed accordingly. If you are younger than 59-112 when you receive this distribution, there is an additional a 10% penalty.