Do you have a client separated from service and age 55 or older? Consider this information before moving 401(k) assets to an IRA.

June 30, 2016

Qualified plan distributions prior to age 59½ may not be subject to 10% federal tax.

Most of us know about the additional 10% federal tax that generally applies to early distributions from IRAs before age 59½. But did you know that qualified plan distributions prior to age 59½ may not be subject to the additional 10% federal tax?

Exceptions to the additional 10% federal tax for qualified plan distributions are not identical to those that apply to IRA distributions.

If employees separate from service during or after the year in which they turn age 55, the additional 10% federal tax will not apply to qualified plan distributions. This exception does not apply to IRAs.

Instead of moving qualified plan assets to an IRA and then taking distributions, it could be a better option to leave all or a portion of the assets in the qualified plan and take distributions from the plan. 


Hypothetical Example

Jane is turning age 55 and will separate from service from her employer this year. She has money in a 401(k) plan and needs a distribution to pay for her dream vacation.

  • If she moves her 401(k) assets to an IRA and then takes a distribution from the IRA, it may be subject to the additional 10% federal tax.
  • If she leaves all or a portion of the assets in the 401(k) plan and takes a distribution from the plan, the distribution will not be subject to the additional 10% federal tax.

Here are some other things of which you should be aware when taking distributions from a qualified plan:

  • Income tax withholding of 20% is mandatory for distributions paid from 401(k) plans to participants.
  • Cash distributions from 401(k) plans are subject to ordinary income tax.
  • Be sure to confirm distribution processing capabilities with the plan. Some plans may not permit multiple distributions for employees that have separated from service.
  • There are other exceptions to the additional 10% federal tax.

IRA and 401(k) distributions can be an important part of retirement planning. You'll want to explore options.

For answers to questions regarding qualified plan and IRA distributions, contact the Pacific Life Retirement Strategies Group at (800) 722-2333, ext. 3939, or send an e-mail to RSG@PacificLIfe.com. We'd be glad to help you.


Attachments/Links:

Picture of Pacific Life Annuities

Pacific Life offers a broad and diversified range of products and solutions designed to help individuals and families achieve asset growth, sustainable retirement income, and long-term financial independence. We also help businesses manage and fulfill their long-term retirement plan commitments to employees.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency