Third bulletin in the "Questions Answered" series - June 6, 2001
CONTACT: Corporate Communications
(617) 563-5800
HOW TO AVOID PENALTY PITFALLS WHEN MAKING RETIREMENTDISTRIBUTION DECISIONS
Investors withdrawing assets from a retirement account can be hit with IRS penalties and additional taxes if they don't know the rules. Depending upon their situation — their age and what assets they hold — they could incur penalties of up to 50 percent of their assets.
Here are the rules for -- and ways to make the most from -- three important withdrawal decisions investors could face at different stages of their lives.
- Retiring Early? Investors can tap their retirement assets before age 59½ without incurring the 10 percent early withdrawal penalty. One way to do so is to use the IRS-approved asset withdrawal method called SEPP (Substantially Equal Period Payments) to withdraw assets penalty-free from their 401(k), 403(b), IRA, or other tax-advantaged plan. By calculating these payments with a SEPP calculator (Fidelity Investments® has one on Fidelity.com), they can determine the potential penalty-free income from that account and be in a better position to determine how quickly their accounts could be depleted. It's important to know that once committed to a SEPP plan, investors cannot increase or decrease their payments, and the payments must continue for at least five years, or until age 59½, whichever is longer. Fidelity Retirement Resource Center at Fidelity.com/retire offers extensive early retirement planning tools and information.
- Changing Jobs or Retiring?Studies show that investors who hold their company's stock in their employer-sponsored retirement plan [such as a 401(k)] hold on average between 24 and 36 percent of their plan assets in their company stock.1 These investors should consider the tax implications before deciding whether to cash out or roll over their assets into an IRA or another qualified plan. In fact, if investors have company stock, they may be able to take advantage of special rules for the Net Unrealized Appreciation (NUA) on that stock. By taking an in-kind distribution of their stock rather than rolling it over to another tax-deferred account, they may have the opportunity to lower their total tax bill. This distribution in turn could maximize the amount of money for their beneficiaries as well as possibly provide the beneficiaries with favorable tax treatment. But there can be shortcomings with this type of distribution to a non-retirement account, including the potential negative impact of a heavy weighting of a single stock on total asset allocations. Using a new tool recently developed for Fidelity investors, a Fidelity Rollover representative at 800-544-5650 can help investors determine the most tax-efficient distribution scenario, and whether using an NUA strategy is advantageous.
- Turning 70½? Beginning in the calendar year following the year in which investors reach age 70½, they will need to start taking Minimum Required Distributions (MRDs) or pay the IRS penalty of 50 percent of the amount of the MRD not taken. The good news is that this year the IRS has made its MRD rules much simpler and more flexible. Pre-retirees and retirees now have the opportunity to stretch out their tax-deferred savings further than they may have been able to under the old rules, which would potentially reduce their immediate income tax liability. In addition, these new proposed regulations generally provide greater flexibility in determining retirement income strategies and strategies for transferring wealth from one generation to the next. MRD calculators, such as the one on Fidelity.com/retirement/MRD, help determine an investor's distribution amount. Note that Roth IRAs are not subject to MRDs during the account owner's lifetime.
Fidelity Investments Retirement Consultants are available to discuss how to make penalty-free and tax-efficient distribution decisions.
Fidelity Investments' Retirement Consultants2 are trained specialists who have received extensive training on financial issues pertaining to retirement. They help customers evaluate their financial situations for retirement, understand their options, prepare a retirement income plan and develop an action plan. Fidelity's retirement consultants also conduct interactive educational seminars, which cover topics such as maximizing income from your retirement savings and managing your 401(k) if you're changing jobs or retiring. They are available to speak with customers via phone or at any of Fidelity's 78 Investor Centers nationwide.
About Fidelity
Fidelity Investments is one of the world's largest providers of financial services with custodied assets of $1.5 trillion, including managed assets of $907.2 billion. Fidelity offers investment management, retirement, brokerage and shareholder services to 16 million individuals and institutions as well as through 5,500 financial intermediaries. The firm is the largest mutual fund company in the United States, the No. 1 provider of workplace retirement savings plans, one of the largest mutual fund supermarkets and a leading online brokerage firm. Fidelity Investments' website is at www.Fidelity.com.
1Employee Benefit Research Institute, 1999.
2Retirement Consultants are associated with Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments Company.
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Fidelity Brokerage Services LLC, Member NYSE/SIPC.
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