Retirement brings you the opportunity to spend time on what matters most in life and finally relax as your career comes to an end. If you’ve taken the right steps throughout your career, then you may be in a position to receive Retirement Plan Distributions. These distributions can be crucial to living comfortably after you’ve stopped working.
Retirement Plan Distributions allow you to receive payments or withdraw money from retirement plans such as 401(k)s and IRAs. They provide you with a consistent income or a lump sum of cash so you don’t need to worry about working as you get older. It’s vital that you understand Retirement Plan Distributions so you don’t incur penalties, maintain a healthy income when you’re no longer working, and save on taxes.
This article will look at how you can get the most out of your retirement plan and set yourself up for long-term financial freedom.
Eligibility for Distributions
The best way to avoid penalties when it comes to your distributions is to understand eligibility.
In the United States, the retirement age is considered 59.5. If you withdraw any money from your retirement plan before retirement age you will incur a 10% penalty on the cash you withdrew. Unless you absolutely need the money, you should really think twice about any early withdrawals. You’ll be far better off in the long run if you stick to the practice of not touching your retirement plan before retirement age.
There are exceptions however to that 10% penalty. Some examples include:
- First Time Homebuyers can withdraw up to 10,000 dollars
- The death of the retirement plan participant
- Total and permanent disability
- Qualified medical expenses
Most of the reasons for the penalty being waived are that something has gone really wrong in your life. It’s important to talk to a qualified financial planner if you’re ever in a position where you need to take money out of your plans so they can help with waiving the fee.
Required Minimum Distributions
A Required Minimum Distribution (RMD) is the minimum amount of funds that you must withdraw from your traditional retirement plan once you reach the age of 72 (increased from 70 with the Secure Act). The government created legislation for RMDs to make sure people don’t use their retirement accounts as a way to avoid paying taxes indefinitely.
The IRS performs a mathematical calculation to inform you how much you need to take out. There will be no penalty if you take out the minimum or more, but it’s possible you’ll have to pay income tax. Some plans allow you to defer the RMD if you’re still employed at 72.
Lump Sums or Installments?
Once you reach the age where you can start receiving distributions, you’ll have the choice of receiving cash in either a lump sum or installments. This is where a lot of people start to feel overwhelmed as there’s a lot of information about what’s the best step to take toward long-term financial freedom.
From our own experience in retirement plans, we typically see clients choose installments as their preferred choice for taking distributions. The two main reasons for this are:
- Taxes: Getting paid in installments helps you spread out your taxes over time and avoid the higher tax rate that may come with a lump sum distribution.
- Financial Stability: It’s difficult to make a sitting lump of cash last. Having installments allows you to have a predictable and stable source of income, providing you with peace of mind in retirement.
There are some pros to choosing a lump sum, such as putting that money into other investments with the help of a qualified financial planner, but this decision should be carefully thought over by a professional as it can lead to greater financial risk.
It’s possible, even likely, that you’ll change companies over your career. And you may be worried about what happens to all the money in the plan at your current place of work if you’re considering a job change. The good news is that you can take all of that money with you if the new plan accepts money from your previous plan with a rollover.
A rollover is the process of transferring retirement assets from one plan to another while avoiding any possible penalties and maintaining your tax-deferred growth.
But what if you want to rollover your retirement plan to an IRA?
Well, you can do that too. A direct rollover to an IRA means that income taxes are still not due. Your future earnings are still tax-deferred and you can now control your money as far as investments are concerned. A direct rollover is an optimal way of transferring assets from account to account.
Planning Retirement with a Professional
Planning for your retirement can be stressful. You want to do everything in your power to make it a period of life that’s as stress-free as possible. Having the knowledge of how to make the most out of your distributions and how to avoid potential pitfalls goes a long way toward making a pleasant retirement possible.
The next step is talking with a team of professionals to find the best plan of action for your financial situation. You can contact RWM today to learn more about retirement plan distributions and how we can help you get ready for retirement.