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!

Helping Your Aging Parent Deal With Their Finances

If you have elderly, but still healthy, parents, grandparents or other relatives who rely on you – now is the time to think about your role with their finances in the event that you may need to help them manage at some point in the future.

Even if your senior is fully functional mentally, other factors may impede them from properly taking care of the business of life.

For example, my 94 year old Mother-in-law lives in a senior living complex, but is not on assisted living of any sort (other than she gets meals and laundry help). She has been quite alert, but has macular degeneration (which means she can’t see well at all) and consequently, her handwriting is unreadable. She can no longer make out a check to pay her bills. She also walks very slowly with her walker and tires easily, meaning she is slow to get things done.

Recently, she fell in her apartment and couldn’t summon help because she stubbornly refuses to wear the call button the family pays for her to use in such situations. She couldn’t get up, was stranded on the floor for at least a day and a half and developed bedsores from the inevitable mess she made.

No one has a power of attorney, let alone a durable power of attorney. The family would have to get a court order to have her judged incompetent in order to get one. This will make it more difficult for the family to help take care of her.

Although I’m encouraging my spouse to be prepared to handle her financial affairs, he is reluctant to do so. Handling someone else’s affairs is fraught with psychological pitfalls. He has 3 siblings – will they think he is trying to take over? She is nearly broke, so it wouldn’t be to get money. He fears that if he starts handling her financial affairs, it will break our bank (i.e. the other siblings wouldn’t volunteer to chip in on the expenses). She is still in her right mind and quite stubborn. There is a lot of history and murky waters between her children and her. She has never voluntarily shared information about her finances. She probably would resent someone handling them for her. Yet, at any time, just that might be needed.

If you have a situation similar to this, how can you prepare? Here are the suggestions I have found and am passing along (or doing with my own grown children).

Have the money talk.

If your parent is willing to talk about their finances, you are lucky. Just start the conversation by letting them know that you aren’t trying to wrest control away, but just want to be prepared in for if and when they might want or need help. Let Mom or Dad show you their filing system, their financial statements, listen as they share with you their cash flow and savings situation. Understand if they want to share the history of special objects they have collected or perhaps inherited from their parents.

Let them make a list, or you start making one to keep track of all of this. Include contact information for medical, dental, insurance, investment, banking, legal, and accounting or business information. If they are willing to share account numbers or social security numbers, let them – but keep the information in strictest confidence and away from the online world.

My spouse and I started yearly family meetings for just these types of purposes. We update both our grown children and their wives with our net worth and prepare and updated home inventory, account list, along with information about our files and locations of documents and valuables.

Make suggestions.

If you, or your senior, are hesitant about talking finances, try sneaking in suggestions during conversations with them.

For instance, your conversation could go something like this:

“Mom, did you hear on the news the other day about so and so? A woman in her 90’s who lived alone had her electricity turned off because the electric company couldn’t read her checks and couldn’t reach her on the phone. Remember yesterday at the grocery store when the clerk couldn’t read your check? If you like, I can make out your checks for you, or if you would prefer, you could fill out this (durable power of attorney) form and we could get that signed, then you wouldn’t have to bother with paying the bills and such. What do you think?”

Be respectful. Give them time, give them choices. It is after all, their money.

Inch your way in to learn about their finances.

If your parents are reluctant to talk money, offer to help them – sort the mail, pay the bills, clean out file cabinets, prepare their tax return and etc. This will get you in the door so you can begin to get a feel for where they are in their financial life and where you will need to look if they become incapacitated.

Offer to do unpleasant tasks and suggest they do something enjoyable in its place (like go to lunch with you once a month in place of balancing their check book to the bank statement.

Get their mail.

If you live close enough or visit often enough, bring their mail in (surreptitiously noting what kinds of mail they are getting). If they don’t object, help them sort through it, noting any bills or requests for money and maybe using them to start a conversation.

My 94 year old Mother-in-law lives independently in a senior facility where she gets some services but has her own apartment. She still gets her mail, but doesn’t always bother to go through it. If she does, she sometimes will try to send off money to any charity with a request. She can’t afford to do that anymore.

My sister-in-law visits her several times a week and has the opportunity to scan through the mail to look for bills or checks that may have come.

Search their home.

With permission, if your parent is still competent, look through piles of paper, file cabinets, stacks of magazines, safety deposit boxes, cabinets, drawers, closets and more to make a list of bills, income, assets, liabilities.

If your parent is no longer capable, do make a search to find the information you need to help your parent with their finances.

Talk to siblings to see what they remember about finances/institutions used.

Over the years, parents may have mentioned in casual conversations, the institutions they used for their financial affairs. Many times, these may still be in effect.

Follow up on each lead.

Call any institutions you find reference to – either from statements, check registers or family members. Ask your parent if they still use so and so person or such and such institution. See if the institution will confirm whether or not your parents have an account there.

What to explore about your elder’s finances.

  • Life insurance (is there a policy on her life, or could there still be money in a policy on her spouse’s life)
  • Cash needs (how much cash does she keep or need to keep around the house)
  • Credit cards (which ones does she have and does she use them)
  • Accounts (will she share information on bank/safety deposit box, brokerage, mutual fund and etc accounts – where are they, who are the contacts, what is the current value, etc)
  • Expenses (what are her typical bills and what categories are they – utility, taxes, clothing, etc)
  • Income (What are the income sources, where does each go, are there any that come in the mail, does the monthly income cover the expenses, etc)
  • Health/car/liability/renters/home and etc insurance (what insurance does she have and with whom)

Communication is paramount.

If you do have to handle someone else’s finances, make extra efforts to not only keep them informed, but also to document everything you do on their behalf and share it with siblings or other primary interested parties, to keep everything out in the open and above board.

Other areas to investigate.

While you are at it, make sure your elder is informed about the following as well:

  • Availability of do not resuscitate orders
  • Medical power of attorney (who can speak for them if they can’t speak for themself)
  • Living will – including what they do and don’t want done if they can’t speak for themselves.
  • Preferences for funeral arrangements (did they prepay, how do they want their remains handled, particular things they want done or not done)

If you are dealing with elder parents or grandparents, what suggestions do you have?