Withdrawal Benefits: Safeguard Your Retirement Funds
Withdrawal benefits offer employees with pension or other retirement plans (such as 401(k) plans) the right to cash out any accrued funds when they leave an employer. If you are under the age of 59½, these funds must be rolled into a qualified retirement plan, such as an individual retirement account (IRA) or a new employer’s plan, to avoid early withdrawal penalties and potential tax liabilities.
Key Insights
- Cashing Out: Withdrawal benefits enable individuals with employer-sponsored retirement accounts to access those funds after leaving employment.
- Avoiding Penalties: Funds must be rolled over to another qualified retirement plan if the individual is younger than the minimum retirement age, typically 59½, to avoid penalties and taxes.
- Vested Benefits: If your employer matches retirement contributions, vested amounts will be included in your withdrawal benefits.
Navigating Your Withdrawal Benefits
Withdrawal benefits primarily apply to defined contribution (DC) plans, where both employers and employees make contributions, often a percentage of the employee’s paycheck. Many companies match employee contributions up to a certain percentage, for instance, someone might receive 50 cents on the dollar up to 6% of their salary.
In limited cases, withdrawal benefits also apply to defined benefit (DB) plans. However, benefits are typically locked in until eligible, usually around age 62.
The value of your benefits depends on your salary, years of service, and whether you are vested. Some companies implement cliff vesting—where benefits encompass company matches after a specific period—while others use graded vesting, meaning benefits accumulate progressively over time.
Who Can Benefit?
Withdrawal benefits frequently impact those leaving midsize to large employers that offer 401(k)s. Vested employees may receive substantial checks—which for some long-term employees could be their largest ever.
Employees younger than the retirement age can transfer their withdrawal benefits to a new employer’s 401(k) or into an IRA to avoid tax penalties, provided this is done within a specified period.
Most retirement plans sponsored by employers and unions in the U.S. are subject to the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC).
Important Withdrawal Benefit Rules
To reinvest your withdrawal benefits without a penalty, it’s essential to follow established rules. Specifically, funds must be deposited into a qualifying IRA or retirement plan within 60 days to evade taxation.
To activate these benefits, employees typically need to complete forms or respond to questions either online or by phone. Processing withdrawal benefits usually takes at least a week.
Employees aged 55 or older may take lump-sum distributions from a 401(k) without incurring early withdrawal penalties. For IRAs, this minimum age is 59½. Be mindful that ordinary income taxes remain applicable.
Related Terms: 401(k), IRA, Defined Contribution Plan, Defined Benefit Plan, Early Withdrawal Penalty.
References
- Internal Revenue Service. “Choosing a Retirement Plan: Defined Benefit Plan”.
- Internal Revenue Service. “401(k) Plan Overview”.
- Internal Revenue Service. “Retirement Topics - Vesting”.
- Internal Revenue Service. “Rollovers of Retirement Plan and IRA Distributions”.
- Internal Revenue Service. “A Guide to Common Qualified Plan Requirements”.
- U.S. Department of Labor. “ERISA”.
- Internal Revenue Service. “Topic No. 558 Additional Tax on Early Distributions from Retirement Plans Other than IRAs”.
- Internal Revenue Service. “Retirement Topics - Exceptions to Tax on Early Distributions”.
