SHELTERED ANNUITIES |
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As difficult as it may be, especially during periods of unemployment, it is important to protect any money put away for retirement (IRA's, 401(k) plans, etc.). The following information will assist you with questions you may have about transferring funds and rollovers. It is always good advice to consult a financial planner prior to early withdrawal of any retirement or 401(k) plan. Most banks or credit unions will have financial counselors available at no cost or very little cost to you. If you have a sheltered annuity it is almost always to your benefit to get professional advice on your investment.
If you are considering an early withdrawal to assist with expenses during the time you are unemployed, you may want to seek assistance from a crediting counseling service, rather than taking the fund distribution.
Pension Plan fund distributions occurring after 1992 requires qualified retirement plans to transfer funds eligible for rollover directly to another plan (such as an IRA), specified by the participant if they so elect. Any fund distributions that are eligible for rollover but are given to an individual rather than being directly rolled over to another eligible plan will be subject to a mandatory 20% withholding tax.
In addition, a 10% excise tax is imposed on taxable fund distributions from any qualified retirement plan, IRA, annuity, or 401(k) before the holder reaches age 59 ½, becomes disabled or dies.
The mandatory 20% withholdings and the 10% excise tax can be avoided if the distribution is a lump-sum payment due to separation from employment or plan termination, and is directly rolled over to an IRA (or other plans which accept rollover distributions). Fund distributions received by an individual, and from which the 20% withholdings has been withheld, will continue to be eligible for rollover up to 60 days.
Many sheltered annuities require that you remove your investment if you have less than a specified amount. If you do not specify where you would like the money transferred the benefit plan administrator may send the distribution directly to you. If that occurs you will be subject to the 20% withholding for federal taxes, the 10% excise for early withdrawal, and state taxes. If you have more than an amount specified in each plan, you may be allowed to leave your investment in the plan. You will however not be allowed to add additional money into your annuity.
Prior to a distribution of funds, an individual should receive written explanation on the option of having funds transferred directly to another eligible plan and about the required withholding and excise tax penalty if funds are not directly transferred.
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans. Click here for more information about ERISA.