Taking Benefits of Defined Contribution Plan

By | March 4, 2015

There are several different ways to take out money from a 401k or other defined contribution plan. Typically, you can choose to receive their benefits in the form of a single payment of your plan, effectively withdrawing money from your account. In these cases, you may have to pay taxes on the amount you receive as a penalty.


Reinvesting defined contribution plan (401k) into IRA or other 401k

Reinvestment  in another retirement plan – can ask your employer to transfer your account balance directly to your new employer’s plan if he accepts such transfers. Reinvestment in an IRA – you can ask your employer to transfer your account balance directly to an IRA.


Balance less than $5,000 in 401k and Lump Sum

If your account balance is less than $ 5,000 when you leave the employer, the plan can perform automatic distribution without your consent. If this distribution is greater than $ 1,000, the plan must automatically reinvest the funds into an IRA it selects, unless you choose to receive a lump sum payment or reinvest it into an IRA you choose. The plan must first send a notice allowing you to make other arrangements, and should follow the rules concerning what type of IRA can be used (ie, you can not combine the distribution with the savings you have deposited directly into an IRA) . The reinvestment must be made in an entity that is qualified to provide personal retirement plans. Also, the rollover IRA must have investments to maintain the principal. IRA provider may not charge excessive fees for such plans which would charge its other customers personal retirement plans.


Choosing Lump Sum Payment from Retirement Plan

Please note: If you choose a lump sum payment and does not transfer the money into another retirement account (IRA or employer plan other than Roth IRA) owe a penalty tax if you are under age 59½ and fails with certain exceptions. In addition, you may have less to live on in retirement. Transfer your balance retirement plan to another plan or IRA when you leave your job will protect the tax advantages of your account and maintain retirement benefits.


What happens if you leave a job and then return to a 401k?

If you leave an employer who has worked for several years and back then, you can have those previous years for the acquisition of rightsGenerally, a plan must retain service credits that you have accumulated if you leave your employer and then return within five years. Service credits refer to the years of service that count for the acquisition of rights to retirement benefits. As these rules are very specific, should carefully read the document in your plan  if contemplating leaving for a short period your employer, then discuss it with your plan administrator. If you left employment before January 1, 1985, different rules apply.


Retiring and Returning to Work

If you retire and then returns to work for a former employer must allow you continue to accrue additional benefits, subject to a limit of the plan on the total years of service credited under the plan.


Steps when leaving employer and re-joining later

  • If you leave an employer before retirement, see if you can reinvest their profits in a new plan or an IRA.
  • If you are leaving your benefits in the plan of his former employer, be sure to keep your former employer aware of the information that allows contact with you, and keep up with the contact information of the employer.
  • If you are considering withdrawing its benefits as a lump sum, find out what taxes and penalties will be paid, and plan how to replace that income in retirement.