A Publication of WTVP

Are you changing jobs or retiring in the next several months?

If you’re like many working individuals, you may be covered by your employer’s 401(k) plan or other retirement plan.

When you leave your job, you may have to make an important decision regarding any distribution you may receive from your employer’s plan. As you will see, the decision is complex, and there are many factors to consider, based upon your personal circumstances.

Generally, you have two choices: deferring taxes by establishing an IRA rollover account, or taking the distribution and paying the taxes on it.

You may also be eligible for one of the favorable tax treatments associated with the taxable option, including:

The amount would be taxed as ordinary income (unless you are eligible for forward averaging) and would become your new cost basis for these securities. This would be your only tax liability until you sold the securities.

Upon selling the securities, you would be taxed on the excess, if any, of the sale price over your cost basis. The excess, if any, up to the value of the securities on the distribution date, would be taxed as a long-term capital gain regardless of when the securities were sold. Any other gain would be taxed under the capital gain rules.

You may not apply this special tax treatment to employer securities if you roll them over to an IRA. When distributed later from an IRA, all securities are taxed as ordinary income at fair market value as of the distribution date. Also, the distribution that includes employer securities must qualify as a "lump sum" under federal tax law.

The decisions you make regarding treatment of your retirement plan distribution has a significant impact on your current income tax, as well as funds available for investment.

Consult your tax advisor to determine which choice is appropriate for your individual situation before making any tax-related investment decisions. IBI