Little Know Facts About Retirement Distributions

You’ve been religiously contributing to your retirement funds for years. Your employer 401K may be your largest investment account. Understanding what you can do and should do with it are huge factors in your successful use of the retirement funds.

I retired in 2010. Here are a few things that surprised me when deciding how to take my distributions.


My company retirement funds were divided into two plans. When I first started, the company made all the contributions and it was all in company stock. Later, when they switched to a combination profit sharing/401k plan, the company shares just rolled into the profit sharing part. From then until my retirement date the company just contributed funds, and matching funds to the 401k.

Because of various lawsuits, the company had been selling stock in the first plan and replacing it with ‘diversified’ funds for about a decade – so that our retirement plan was not concentrated in company stock. Even during the 2008/2009 recession stock was redeemed and the proceeds placed into the ‘diversified’ funds. The stock price at the time was ¼ of the value it had been in 2007. I hated that I had no control over these sales. I wanted that stock in my control so I could manage it the way I thought best for my personal situation.

When you retire, you can choose what to do with your retirement account. Options include rolling your company profit sharing or 401K over to a traditional IRA (or a Roth if you were fortunate enough to have a Roth 401K), leaving it with the company plan sponsor or taking a lump sum distribution. However, if you take that lump sum distribution you probably will owe a lot in income tax the year you take it. There is one scenario where a lump sum can be beneficial though.

The Net Unrealized Appreciation (NUA) rule scenario.

There is a special tax rule (or was when I took distributions) called NUA which lets you avoid paying earned income tax rates on the net unrealized appreciation of the stock since it was placed in the plan for you. To benefit from this rule I had to take the stock as a lump sum distribution (not roll it over into an IRA). I will have to pay long term capital gains on the stock when I sell it. The capital gains can be significant and costly, but usually are cheaper than letting the stock appreciate in the account and paying income taxes on the appreciated value. For instance, my company stock was valued at about $6 a share, but now is worth over $115 a share. After talking it over with my accountant, we decided using this option would save me tax money in the long run – plus it let me put the stock into a taxable brokerage account that I control. An added bonus, if the tax laws don’t change, is that if I still have the stock in my brokerage account when it passes to my beneficiaries, the cost basis rises to the then current market value. Consult an accountant if you have company stock or other company securities in your retirement plan, to see what works best for your situation.

You may not be able to do a trustee to trustee rollover.

Since I have IRAs and have changed custodians on them, I am familiar with trustee to trustee rollovers – where I never touch the money or see a check. This is the easiest way to avoid a tax bite when changing custodians on your IRA.

I thought this is what I would do when I rolled over what the company called the ‘diversified’ fund of my Employee Stock Ownership plan (the money they got from selling my company stock) to an IRA, but it is not what did happen. My company insisted on sending me a check, which I then had to send along to the custodian of the new IRA I set up to handle the funds. This took a lot of coordination, done by me, to ensure that the check was made out correctly so the custodian could accept it. As a side note, I then had to decide what to invest the ‘diversified’ fund money in and set up some automatic transactions to make that happen over time.

Don’t plan on moving investments ‘in kind’.

I assumed I would be able to just transfer shares of the mutual funds in my 401K to another custodian when I took the funds out of the company plan and put them into an IRA. But my company’s 401K custodian insisted on cashing out the shares and sending along a check. The share class was institutional and institutional shares apparently can’t be held within an individual IRA. Back in 2010 our asset allocation called for international components and the 401k fund was filling a lot of that allocation. If you recall, international funds were doing very poorly back then. I ended up having to sell and invest again in another international fund.

You may have to start paying plan sponsor fees.

If you plan to just leave your investment with the company’s plan sponsor, not only will you be restricted to their choice of investments, but they also may start charging you the plan sponsor fee on your account. My company pays that fee if you are an employee. Not so much if you are retired! The sponsor would have started charging me one percent of the profit sharing balance each year.

Rolling the funds to an IRA with a low cost institution worked for me. I don’t pay any fee on my IRA at all.

If you are within a few years of retiring (or moving your money from your current plan sponsor to an IRA), talk to folks who have been there in your company to see what they have encountered. Ask to see the materials that the company sends to folks eligible for retirement to see what considerations might be a surprise to you.

Did you have surprises or unanticipated complexities when taking control of your retirement plan assets? If so, please share in the comments!

4 key money habits to impact to your children when young

Who we become when we are adults always stems from what we were taught when growing up and especially what we learnt from our parents. As your children grow, they are always observing how you earn, spend, save and invest your money. To ensure that they grow into being financially free individuals, you should start teaching your children the right money habits and attitudes from their tender age. This will result to them being more prudent in personal budgeting and financial planning when they grow up; and avoid the rat race of earning to pay monthly bills without saving and investing for their future. Explained below are 4 key money habits that will help shape your children’s view of money as they grow into adulthood.


  • Be a good role model for your children on financial management


As mentioned above, children learn a lot of habits by observing their parents and picking from them certain behaviors and character traits. Your children watch how you spend your money and pick financial management tips from you as they grow. If you are always out in the malls shopping with them, they will get the impression that you can always spend as much as you want and get anything you want anytime. If you eat out a lot as a family, the children will also pick up the habit and they will never learn the habit of buying groceries and cooking at home in order to save on monthly food costs. To be a good financial role model to your children, teach them how to be frugal and how to spend money on the important things first; so that they learn the art of budgeting and prioritizing their financial obligations.


  • Instill the virtue of delayed gratification in your children


Most parents give in to every request that their children make just because they have the money to buy them the things that they want. However, this creates a perception in the children that they can always have whatever it is that they want whenever they want it without considering the financial implication of the unplanned shopping. Ultimately, the children will grow into being careless spenders who cannot delay their immediate desires in order to save for a bigger goal in the future.

To prevent this bad money habit from developing, you should learn the art of letting your children know that they cannot always pick items in a supermarket that were not part of the shopping list. When they request for gifts and toys, always ensure that before they get them they either work for them or they wait for some special occasion in the future for them to receive them. This will teach your children patience as well as help them to learn the fact that they need to work for and earn whatever gift or toy they get.


  • Teach your children how to save in order to fund their long term goals


Children need to learn from an early age that not all money they earn should be spent immediately. They need to be taught how to save towards acquiring a toy or any other thing that they would like to have. When your children get some pocket money, teach them to save at least one third in a bank account and spend the remaining on important things today. Every month get them their bank account statements to show them how their savings are growing towards the total amount they need to buy a bike, toy or pay for their trip to Disneyland.  This will keep them motivated to save more and after saving towards two or more goals successfully, they will have developed the savings culture that they will carry on into their adulthood.


  • Let your children learn from their mistakes at an early age


If your children want to spend their savings recklessly on some trivial items that they will regret later on, just let them go ahead and do it. After saving for a long period of time and delaying their gratification, they will learn a sad lesson if their savings go into buying toys or other things that breakdown or get finished in  short period of time. They will regret having saved for a long time only to waste the money in short-term items; and this will help them to be more cautious next time when planning how to spend their savings.

In summary, let your children learn from your financial habits as their parent and give them a chance to make and learn from their mistakes early on before they start earning their own money as adults.