Taking distributions from your 401k or retirement plan

At some point in time, whether it's when you reach retirement, or simply when you change employers, you'll eventually need to take distributions from your 401(k) or retirement plan. How does that work? Are there tax implications? Other things you should consider?



Well fear not, retirement saver, our experts have some great information for you. Listen in, or read on, as Jason and Kristy highlight some key things you should know.

 

Audio Transcription:



Jason

Hi everyone, thanks for joining us for this episode of retirement chat. In this series of conversations, we discuss some key topics related to of course, saving for retirement. The idea here is to just build on a foundation of information, to help you understand your retirement plan, and to help you reach the retirement that you envision for yourself.

Today, we're going to be discussing a little bit about client services within retirement plan services, but in particular, we're going to be talking about distributions. I am your host, Jason, and today I'm lucky enough to have as my guest Kristy Leitschuck of Retirement Plan Services. Kristy, just before we get started, do you want to just let everybody know a little bit about your role within retirement plan services?

Kristy

Thanks, Jason, yeah, I oversee the client services department and what our team does is, it's responsible for helping not only the participants, but the plan sponsors fully operate and get the best benefit out of their retirement plan.

Jason

Thanks. So that was my first question was, a little bit about what client services does. And so in terms of talking about distributions, what does your team do when it comes to when a participant or an employee says they want to take a distribution?

Kristy

Sure, there are a couple things that have to take place once we receive your termination date. If you are fully terminated from your employer, once we receive the termination date, there's a 20-day wait on that so you can then get all of the appropriate documentation provided to you to make a decision as to what best fits your needs. Once you've made that decision, you can go online or request paperwork and fill out that distribution. And we will process that within a seven to 10 day business timeframe.

Jason

Speaking of their options, because we, I know in Retirement Plan Services, get a lot of questions about what my options are once I retire. So could you go into a little bit of that detail as far as what a person's options might be when it comes to taking a distribution or just getting that information that, “Hey, look, you've terminated from employment, here are the next steps.”

Kristy

Absolutely. It really depends on how your retirement plan is set up and it differs by employer. So you're going to first want to make sure and check the summary plan description and any of the information that you have on record on your participant website. Once you're ready to do that and look at the summary plan description, you have options. You can take the money as a lump sum distribution; you can do a direct rollover to your employer if your new employer allows for those distributions to; or those contributions to come in and you can also… either you can roll it to an IRA or set it up as a monthly distribution, again, depending on what your plan allows.

Jason

So when you say, “depending on what your plan allows,” so we obviously in Retirement Plan Services, we, serve a lot of different companies, a lot of different plans they're all set up differently. Correct?

Kristy

Correct.

Jason

So that's what you mean by every plan might have their own rules as far as timing or as far as being able to set up distributions.

Kristy

Absolutely, yes.

Jason

Okay. Perfect. Are there any standard — because we always get those questions about taxes too, right — so are there any standard withholdings or anything like that when it comes to these things?

Kristy

Yeah, absolutely. So as a bank and trust, we are required to withhold 20% federal taxes. And then if you live in the state of Nebraska or Kansas, it's a 5% state tax that we withhold for you. And then we will provide you a 1099-R the following year to prepare those taxes.

Jason

So a lot of companies have the choice between doing traditional pre-tax contributions and of course, Roth contributions. Is there, if a person wants to, are they able to take money just out of a specific source? And if it's a Roth source, is that a different process maybe than a typical withdrawal?

Kristy

Yeah. So if you have pre-tax and Roth funds that you've been saving and you've come, been ready for retirement, the first thing that you're going to want to do is speak with your financial advisor to find out what exactly is the best option for you. If you've saved for Roth, you want to make sure that you're going to have a qualified distribution, which means that you're not going to take any penalty by taking out that money first. Once you've figured that out, you will then send paperwork into us and you can designate which source you want and really the timing of when you want it. So if for one year you want just pre-tax money, you can do that. And then the next year you want to change that to Roth based on your tax income requirements, you can do that as well. And it's just a simple phone call to us.

Jason

So the process is — and this is probably my final question when it comes to distributions — is, does every plan have the same withdrawal options? In other words, is it always going to be, I use the word always loosely, online? Is it some paper, or is there a combination or is that again, just depending on the employer?

Kristy

Again, that depends on the employer. A majority of our plans do allow for online distributions. However, if you are in a city plan or a governmental plan that does require specific paperwork that we are not allowed to provide online, and so therefore that's one reason why you would have to do that. Another option would be is if you have a certain type of money that requires a spouse signature, then we would need that information on paper. And so we're going to send you paperwork for that. If you call into our 800 number, we're going to walk through that with you as to what you need to do and what paperwork we'll send and the timing for that.

Jason

Perfect, that’s my last question is, who can they call or can they call… a group of folks that can answer those questions and help people with that?

Kristy

We do, yes. We have a designated call center that is there Monday through Friday, between eight and five central time that we are happy to help you with whatever questions you may have.

Jason

I think you might have touched on this real quick and I'll revisit it really quickly, but is there a certain amount of time between somebody leaving their employment and when they can actually take the distribution?

Kristy

Yeah. So again, that depends on the employer, okay, and how fast they can get us the termination date. A lot of things that come into play with that is the other benefits that you have with the employer as a whole. So it's not just your retirement plan, but it's everything that that employer does for you for that. And so what happens is they send us the termination date. We might receive one more final contribution for you. So we want to make sure that that's all posted to your account, make sure that everything is ready for you, so that we just have to do one distribution.

Jason

Perfect, thank you, Kristy. I think if I'm hearing this all just kind of come together a little bit, a person terminates or leaves their employment, client services will then send some information basically giving them all of their options. And of course they can call into client services at any time to have somebody help them walk through those options and actually take the distribution if they choose to do so.

Kristy

That's correct. Yes.

Jason

Perfect, thanks Kristy, I appreciate your time today.

Please keep in mind that the information that was provided here is for informational purposes only. As educators we're able to give you education; we are not able to give you financial advice. This is strictly for your information only.