Distribution Options: Taking Money from Your Retirement Plan
When it comes to retirement planning, how much you save and how you invest that money during your working years are important parts of the process. But there’s another factor that, over the long term, can be just as important: It’s the distribution method(s) you choose1 when you take money from your retirement account. The decision you make can have a great impact on the kind of lifestyle you’ll be able to enjoy in your retirement.
When Distributions Can Occur
A retirement plan distribution is typically available to plan participants who are:
- No longer employed by the organization providing the benefit
- Eligible to take a hardship withdrawal or another type of withdrawal, if available
Timing Considerations for Initiating Distributions
- Generally, individuals initially become eligible to take a distribution from their retirement plan when they reach age 59½—whether or not they are still working.1(There is no requirement, however, for participants to begin receiving distributions at this time.)
- Those who stop working and take one or more distributions before age 59½ will have their payouts treated as early withdrawals by the IRS, and may be subject to a 10% early withdrawal penalty2 in addition to income tax.
Distribution Rules for Retirees
Under the terms of your defined contribution plan (i.e., your 401(k), 403(b), or governmental 457(b) plan), you are required by law to begin taking distributions from your account by April 1 following the year in which you reach age 70½, or when you retire, if later—and every year thereafter as long as you have money in the account. (These are what are commonly referred to as “required minimum distributions” or RMDs.) In any year in which you fail to take your required minimum distribution, you’ll risk incurring a 50% penalty on the RMD amount from the IRS.3 To help you determine the amount of your RMD, use the Required Minimum Distribution (RMD) Calculator.
Distribution Options at Retirement
Generally, defined contribution plans offer various ways for retiring participants to take distributions. These may include:
- Keeping the money in your current retirement plan and withdrawing funds as you like
- Purchasing an annuity
- Taking a lump-sum cash distribution
- Taking a rollover distribution
Each of these distribution options is outlined in the table below—along with some of the advantages, disadvantages and special considerations.
To find out which options are available through your plan, as well as the specific rules pertaining to your plan’s distributions, contact Prudential Retirement® or your plan administrator.
|Distribution Option1||How It Works1||Important Considerations1|
|Keep the money in your current retirement plan and withdraw funds as you like||
Generally, you may either:
While you are receiving distributions, your unpaid retirement account balance remains invested in the plan investments you have chosen.1
|Use part or all of your account balance to purchase an annuity||
An annuity is essentially an insurance product that guarantees a series of regular (usually monthly) payments. The amount of your payment will depend on:
|Take a lump-sum distribution||
You’ll receive a one-time payment of your entire retirement account balance. Your distribution will include:
|Take a rollover distribution||You’ll transfer part or all of your retirement account balance to another tax-deferred retirement account.||
Before You Make Your Distribution Decision…
Only you can decide how you want to receive the money in your retirement account. When weighing your plan’s distribution options, you may wish to consider the following:
- How do you want to use your retirement account assets: Do you want to draw retirement income for the rest of your life—or leave some of your retirement money for your heirs?
- People are living longer, so there’s a good chance you’ll be retired for 20 to 25 years—or more.
- If you’ll need retirement income for your lifetime, consider using a sustainable withdrawal schedule, or you’ll risk outliving your savings. As a general guideline, many financial professionals advise that annual retirement account withdrawals not exceed more than 4% or 5% of an individual’s nest egg.
1 Subject to plan provisions.
2 Governmental 457 plan withdrawals are not subject to the 10% premature distribution penalty. Separation from service after age 55 is one exception to the penalty. Others may also apply.
3 The penalty for not taking a required minimum distribution is 50% of the minimum distribution amount that you should have withdrawn.
4 “Vesting” refers to that portion of your employer’s contributions that you own. Based on your plan provisions, you may be vested for all or only a portion of your employer’s contributions. Contact Prudential Retirement or your plan administrator for more information.