Retirement plan regulation requires that dozens of potential notices be regularly sent to participants. One such notice is required under rule 402(f) whenever a participant is about to receive a distribution of $200 or more from the plan. According to the IRS, “The written explanation must describe the direct rollover rules, the mandatory income tax withholding rules for distributions not directly rolled over, the tax treatment of distributions not rolled over, and when distributions may be subject to different restrictions and tax consequences after being rolled over.”
If you are distributing all or most of your retirement plan assets via a check or as a lump sum disbursement to your taxable account, you are probably making a costly mistake. The correct choice is nearly always a direct trustee-to-trustee rollover by transferring Roth assets to a Roth IRA and traditional assets to an IRA Rollover.
The IRS regulation is an attempt to protect participants who don’t understand the rules set up by the government from making a costly mistake by withdrawing the funds and having a check sent to them.
If you don’t use a direct trustee-to-trustee transfer but instead withdraw from an employer-sponsored retirement plan, the plan is required to withhold 20% of the payment for federal income taxes. After having taken the assets to check, you normally have 60 days to put that money back into a retirement plan without having it be a taxable event. However, the required 20% withholding makes that more difficult. To complete a rollover of all the assets during the 60-day rollover window, you must use other funds to make up for the 20% withheld. If you intended to put the money back into a retirement plan, this can be a costly mistake or even make a rollover impossible.
Also, if you withdraw directly from a retirement account when you are under age 59 1/2, your withdrawal can be subject to a 10% penalty in addition to owing tax on the withdrawal. Again, this can be very expensive.
The required notice contains these and other warnings about government imposed taxes, rules, and regulations.
The notice must be given to the participant no less than 30 days and no more than 180 days before the distribution is to be made. The participant is allowed to waive the 30-day waiting period with the assumption that they understand the rules and are making a fully informed decision.
The distribution request form used by our third-party administrator contains the language, “I elect to waive my 30-Day Election Period (no less than 7 days), unless I have checked the following box.” This is followed by a check box where the participant can select, “I elect not to waive my 30-day election period. I understand this may delay my distribution.”
Waiving your 30-day waiting period speeds your distribution and assumes that you have the sufficient time and knowledge to do a trustee-to-trustee rollover in the most tax efficient manner.
If you need help rolling over your retirement assets, you may be interested in “How to Rollover Your 401(k) into a Schwab Institutional Intelligent Portfolio with Marotta Wealth Management” or our Paperwork Preparation bonus service.
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