One of the biggest amounts of money you will ever have access to in your life may be the distribution from your retirement account. Understanding what you can do and should do with it are huge factors in your successful use of the retirement funds.
I retired last year. I want to share a few things that surprised me when deciding how to take my distributions.
My company retirement funds were divided into two plans. When I started at the company, they had an employee stock plan – where the company made all the contributions but they were all in shares of the company stock. About half way through my career with them, they switched over to a Profit sharing/401K plan – with the company contributing cash to a the profit sharing part, the employee contributing to the 401k part with a company match up to 3%. Not bad plans actually.
For about a decade, the company had been selling stock in the first plan and replacing it with ‘diversified’ funds – so that our retirement plan was not concentrated in company stock. Even during the 2008/2009 recession stock was redeemed and the proceeds placed into the ‘diversified’ funds. The stock price at the time was ¼ of the value it had been in 2007, so needless to say I wasn’t real happy about these transactions. I wanted that stock in my control so I could manage it the way I thought best for my personal situation. The company was managing it so as to be held blameless – not necessarily for my best results!
Here are four things you should know – things that may or may not apply to you, but did happen to me. Remember that your retirement plan and plan sponsor are most likely very differnt than mine and will have their own rules, quirks and surprises. This is just what happened to me.
I got to benefit from the Net Unrealized Appreciation (NUA) rule.
There is a special tax rule (or was when I took distributions) called NUA which lets you avoid paying earned income tax rates on the net unrealized appreciation of the stock since it was placed in the plan for you. To benefit from this rule I had to take the stock as a lump sum distribution (not roll it over into an IRA). I will have to pay long term capital gains on the stock when I sell it however. After talking it over with my accountant, we decided this would save me tax money – plus it let me put the stock into a taxable brokerage account that I control. Consult an accountant if you have company stock or other company securities in your retirement plan, to see what works best for your situation.
I couldn’t do a trustee to trustee rollover.
Since I have IRAs and have changed custodians on them, I am familiar with trustee to trustee rollovers – where I never touch the money or see a check. This is the easiest way to avoid a tax bite when changing custodians on your IRA.
This is what I was expecting to happen when I rolled over the ‘diversified’ fund part of my Employee Stock Ownership plan to an IRA, but it is not what did happen. My company insisted on sending me a check, which I then had to send along to the custodian of the new IRA I set up to handle the funds. This took a
lot of coordination, done by me, to ensure that the check was made out correctly so the custodian could accept it. As a side note, I then had to decide what to invest the ‘diversified’ fund money in and set up some automatic transactions to make that happen over time.
I had to cash out of the 401K to move it.
Since I was invested in mutual funds in my 401K, I had blithely assumed – pretty much since I started contributing – that I would be able to move those shares ‘in kind’ to another institution when I took the funds out of the 401K and put them into an IRA with another custodian. For me, this is not going
My company’s 401K custodian insists on cashing out the shares and sending along a check. They say this is because the shares are institutional and I guess you can’t have institutional shares in an individual IRA. This is bad news for me, on a small scale, because I hadn’t moved one of my international
funds into a money market or bond fund by the time I left work. Our asset allocation called for international components and the 401k fund was filling a lot of that allocation. So, here we are in 2011 – with the international scene in a huge down turn.
My company is refusing to pay plan sponsor fees.
The downturn wouldn’t matter too much, I could just leave the 401K/Profit sharing plan with the current plan sponsor – except that the company has decided they will no longer pay the fees associated with the profit sharing piece of it. The sponsor will begin charging me one percent of the profit sharing balance each year – starting in January. Apparently – unbeknownst to me – the company I worked for had been paying this management fee the whole time – and will still pay it but only for current employees. We did get two months notice, but in this market, that really isn’t enough time for my shares to recover.
So I guess my choice now is to either pay the fee or take the loss, get right back into international shares while they are still down and move the funds to my own IRA.
Get the scoop ahead of time!
If you are within a few years of retiring (or moving your money from your current plan sponsor to an IRA), read those boring plans – and not just the summary! Talk to folks who have been there in your company to see what they have encountered. Ask to see the materials that the company sends to folks eligible for retirement to see what considerations might be a surprise to you and talk to someone in your retirement department to get the low down from them ahead of time.
Did you have surprises or unanticipated complexities when taking control of your retirement plan assets? If so, please share in the comments!