What Are Withdrawal Benefits?
Let me explain withdrawal benefits to you directly: they are the rights you have as an employee with a pension or other retirement plan, like a 401(k), to cash out any accumulated funds when you leave your employer.
If you're younger than 59½, you need to roll these funds into a qualified retirement plan—either at your new job or into an individual retirement account (IRA)—or you'll face an early withdrawal penalty, plus any deferred taxes you owe.
Key Takeaways
- Withdrawal benefits let you claim funds from an employer-sponsored retirement account when you leave that employer.
- If you're under the minimum retirement age, roll over these funds to another qualified plan, or expect penalties and taxes.
- If your company matches contributions, any vested amounts are part of your withdrawal benefits.
Understanding Withdrawal Benefits
You should know that withdrawal benefits most often apply to defined contribution (DC) plans, where both you and your employer contribute a fixed amount or percentage of your paycheck to something like a 401(k). Many employers match your savings at a set ratio, say 50 cents on the dollar up to 6% of your salary.
These benefits can also relate to defined benefit (DB) plans, or traditional pensions, but usually, any benefits stay locked until you're eligible, often at age 62.
The value of your withdrawal benefits depends on your salary, years of service, and other factors, and it hinges on whether you're vested. Some places use cliff vesting, where everything vests after a set number of years, while others have graded vesting that builds up over time.
Who Are the Recipients of Withdrawal Benefits?
Withdrawal benefits typically come into play for employees leaving midsize-to-large companies that offer 401(k)s. If you're vested, you often get a check for these benefits, and for long-term employees, it could be the biggest check you've ever seen.
Under certain conditions, if you're not yet retirement age, you can roll over this check to a new employer's 401(k) or an IRA for a limited time without taxes or penalties.
Keep in mind that most private industry retirement plans sponsored by employers or unions in the U.S. are covered by the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC).
Basic Rules Related to Withdrawal Benefits
Reinvesting your withdrawal benefits without penalties is straightforward if you follow the rules: get that check into a qualifying IRA or retirement plan within 60 days, or you'll owe taxes. Make sure to confirm with your new employer that their plan qualifies.
To receive these benefits, you'll need to fill out forms or answer questions online or by phone, and processing usually takes a week or more.
If you're 55 or older and taking benefits from a 401(k), you might get a lump-sum distribution without an early withdrawal penalty; for IRAs, the age is 59½. In both cases, you still pay ordinary income taxes.
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