Withdraw or “distribute” the money
Carefully consider all of the financial consequences before cashing out. The impact will vary depending on your age and tax situation. Distributions prior to age 59 1/2 may be subject to both ordinary income taxes and a 10% IRS tax penalty. If you must access the money, consider withdrawing only what you need until you can find other sources of cash.
You have immediate access to your retirement savings and can use however you wish.
Although distributions from the plan are subject to ordinary income taxes, penalty-free distributions can be taken if you turn:
Age 55 or older in the year you leave your company.
Age 50 or older in the year you stop working as a public safety employee (certain local, state or federal) — such as a police officer, firefighter, emergency medical technician, or air traffic controller — and are taking distributions from a governmental defined benefit pension or governmental defined contribution plan. Check with the plan administrator to see if you are eligible.
If you own employer securities, a distribution may qualify for the favorable tax treatment of NUA.
Keep in mind
Your former employer is required to withhold 20% of your distribution for federal taxes.
Distribution may be subject to federal, state and local taxes unless rolled over to an IRA or another employer plan within 60 days.
Your investments lose their tax-advantaged growth potential.
Your retirement may be delayed, or the amount you’ll have to live on later may be reduced.
Depending on your financial situation, you may be able to access a portion of your funds while keeping the remainder saved in a retirement account. This can help lower your tax liability while continuing to help you save for your retirement. Ask your plan administrator if partial distributions are allowed.
If you leave your company before the year you turn 55 (or age 50 for public service employees), you may owe a 10% IRS tax penalty on the distribution.
What to consider if you own company stock
Net unrealized appreciation (NUA) is defined as the difference between the value at distribution of the employer security in your plan and the stock’s cost basis. The cost basis is the original purchase price paid within the plan. Assuming the security has increased in value, the difference is NUA. NUA of employer securities received as part of an eligible lump-sum distribution from an employer retirement plan qualifies for special tax treatment. In most cases, NUA will be available only for lump-sum distributions — partial distributions do not qualify.
We can help educate you so you can decide which option makes the most sense for your specific situation.