What Are My 401(k) or Other Qualified Employer Sponsored Retirement Plan Distribution Options?

Rolling your money to an IRA allows your assets to continue their tax-advantaged status and growth potential, the same as in your employer's plan. In addition, an IRA often gives you access to more investment options than are typically available in a QRP and investment advice. An IRA lets you decide how you want to manage your investments, whether that's using an online account with which you can choose investments on your own or working with a professional who can help you choose investments.

Features

• Investments retain tax-advantaged growth potential.
• Access to more investment choices, which provide greater potential diversification.
• Ability to maintain your retirement savings along with your other financial accounts.
• Additional contributions are allowed, if eligible.
• Additional exceptions to the IRS 10% additional tax for a early or pre-59½ distributions (10% additional tax) including for higher education and first time homebuyer.
• Traditional and Roth IRA contributions and earnings are protected from creditors in federal bankruptcy proceedings to a maximum limit of $1,512,350, adjusted periodically for inflation.
• Rollovers from QRPs, SEP, and SIMPLE IRAs have no maximum limit for federal bankruptcy protection.
  

Keep in mind

• IRA fees and expenses are generally higher than those in your QRP and depend primarily on your investment choices.
• Required minimum distributions (RMDs) begin April 1 following the year you reach 73, and annually thereafter. The aggregated amount of your RMDs can be taken from any of your Traditional, SEP, or SIMPLE IRAs. Roth IRA owners have no RMDs.
• IRAs are subject to state creditor laws regarding malpractice, divorce, creditors outside of bankruptcy, or other types of lawsuits.
• If you own appreciated employer securities, favorable tax treatment of net unrealized appreciation (NUA) is lost if rolled into an IRA.
• In addition to ordinary income tax, distributions prior to age 59½ may be subject to a 10% additional tax.

Wells Fargo offers IRAs along with a variety of ways to manage your savings. Learn more about our options.

Note: If you choose this option, you’ll want to research the difference between a Traditional and Roth IRA and where you would like to open an IRA, start the process of moving your savings over to your IRA, periodically review your investments, and take RMDs (once you reach RMD age).

While this approach requires nothing of you in the short term, managing multiple retirement accounts can be cumbersome and confusing in the long run. And, you will continue to be subject to the QRPs rules regarding investment choices, distribution options, and loan availability. If you choose to leave your savings with your former employer, remember to periodically review your investments and carefully track associated account documents and information.

Features

• No immediate action required of you.
• Assets retain their tax-advantaged growth potential.
• You typically have the ability to leave your savings in their current investments.
• Fees and expenses are generally lower in a QRP.
• You avoid the 10% additional tax on distributions from that plan if you leave the company in the year you turn age 55 or older (age 50 or older for certain public safety employees and private sector firefighters).
• Generally, QRPs have bankruptcy and creditor protection under the Employee Retirement Income Security Act (ERISA).
• Employer securities (company stock) in your plan may have increased in value. The difference between the price you paid (cost basis) and the stock’s increased price is NUA. Favorable tax treatment may be available for appreciated employer securities owned in the plan.
  

Keep in mind

• Your former employer may not allow you to keep your assets in the plan.
• You must maintain a relationship with your former employer, possibly for decades.
• You generally are allowed to repay an outstanding loan within a short period of time.
• Additional contributions are generally not allowed. In addition to ordinary income tax, distributions prior to age 59½ may be subject to a 10% additional tax.
  
• RMDs, from your former employer’s plan, begin April 1 following the year you reach age 73 and continue annually thereafter.
• RMDs must be taken from each QRP; aggregation is not allowed.
• Not all employer-sponsored plans have bankruptcy and creditor protection under ERISA.
  

If you choose this option, remember to periodically review your investments, carefully track associated paperwork and documents, and take RMDs (once you reach RMD age) from each of your retirement accounts.

If you are at a new company, moving your retirement savings to this employer’s QRP may be an option. This option may be appropriate if you’d like to keep your retirement savings in one account, and if you’re satisfied with investment choices offered by this plan. This alternative shares many of the same features and considerations of leaving your money with your former employer.

Features

• Assets retain their tax-advantaged growth potential.
• Fees and expenses are generally lower in a QRP.
• You avoid the 10% additional tax on distributions from that plan if you leave the company in the year you turn age 55 or older (age 50 or older for certain public safety employees and private sector firefighters).
• RMDs may be deferred beyond age 73 if the plan allows, you are still employed and not a 5% or more owner of the company.
• Generally, QRPs have bankruptcy and creditor protection under ERISA.
  

Keep in mind

• Option not available to everyone (eligibility determined by new employer’s plan).
• Waiting period for enrolling in new employer’s plan may apply.
• New employer’s plan will determine:
  • When and how you access your retirement savings.
  • Which investment options are available to you.
• You can transfer or roll over only plan assets that your new employer permits.
• Favorable tax treatment of appreciated employer securities is lost if moved into another QRP.

Note: If you choose this option, make sure your new employer will accept a transfer from your old plan, and then contact the new plan provider to get the process started. Also, remember to periodically review your investments, and carefully track associated paperwork and documents. There may be no RMDs from your QRP where you are currently employed, as long as the plan allows and you are not a 5% or more owner of that company.

You should carefully consider all the financial consequences before cashing out your QRP savings. The impact will vary depending on your age and tax situation. If you absolutely must access the money, you may want to consider distributing only what you need until you can find other sources of cash.  Before making this choice, use our online early-distribution (401(k) or Other Qualified Employer Sponsored Retirement Plan (QRP) Early Distribution Costs Calculator).

Features

• You have immediate access to your retirement money and can use it however you wish.
• Although distributions from the plan are subject to ordinary income taxes, you avoid the 10% additional tax on distributions taken if you turn:
  • Age 55 or older in the year you leave your company.
  • Age 50 or older or 25 years of service (whichever is first) in the year you stop working as a public safety employee (certain local, state or federal) — such as a police officer, firefighter, or emergency medical technician — and are taking distributions from a governmental defined benefit pension or governmental defined contribution plan. This also applies to private sector firefighters taking distributions from a qualified retirement plan or 403(b). Check with plan administrator to see if you are eligible. 
• Lump-sum distribution of appreciated employer securities may qualify for favorable tax treatment of NUA.
  

Keep in mind

• Your former employer is required to withhold 20% for the IRS.
• The distribution may be subject to federal, state, and local taxes unless rolled over to an IRA or another QRP within 60 days.
• Funds lose tax-advantaged growth potential.
• Retirement may be delayed, or the amount you’ll have to live on later may be reduced.
• If you leave your company before the year you turn 55 (or age 50 for public safety employees and private sector firefighters), you may owe a 10% additional tax on the distribution. 
• Note: Depending on your financial situation, you may be able to access a portion of your funds while keeping the remainder saved in a retirement account. This can help lower your tax liability while continuing to help you save for your retirement. Ask your plan administrator if partial distributions are allowed from your employer's QRP.