If you have previously worked for a company, you may be familiar with the regulations for contributing to a 401(k) plan. But are you conversant with the withdrawal regulations? Federal law restricts the available withdrawal options for 401(k) plans. However, a 401(k) plan may offer fewer withdrawal options than the law permits and may prohibit you from withdrawing any funds until you depart University of California. Nevertheless, many 401(k) plans are more adaptable.
Recent research by Fidelity Investments shows that more 60-year-olds are choosing to take in-service withdrawals from their 401(k) plans to pay off debt or cover unexpected expenses. According to their analysis, nearly 1 in 5 60-year-olds took an in-service withdrawal in 2020, a significant increase from previous years. While it's important to carefully consider the potential impact of such withdrawals on retirement savings, for those with pressing financial needs, an in-service withdrawal can provide a valuable source of liquidity. (Source: Fidelity Investments, 'In-Service Withdrawals from 401(k) Plans: What You Need to Know,' March 2021).
First, consider a plan loan
Numerous 401(k) plans permit you to obtain funds from your account. Clients of University of California who do not qualify for a withdrawal, do not want to incur the taxes and penalties that may apply to a withdrawal, or do not want to irrevocably deplete their retirement assets may find a loan attractive. (You must also accept any available loans from all plans potentially maintained by University of California before you can withdraw your own pretax or Roth contributions from a 401(k) plan due to hardship.)
In general, you may borrow up to $50,000, or half of your vested account balance (including your contributions, University of California's prospective contributions, and earnings).
You may acquire the funds for a maximum of five years (or longer if the loan is for the purchase of your primary residence). In most cases, the loan is repaid via payroll deduction, with principal and interest being deposited back into your account. However, bear in mind that when you borrow, the unpaid principal of your loan is no longer contributing to your 401(k).
Withdrawing your own contributions
If you have made after-tax (non-Roth) contributions to your 401(k), you may withdraw those dollars (and any investment earnings on them) at any time and for any reason. You may only withdraw your pretax and Roth contributions (also known as 'elective deferrals') for one of the following reasons, and only if your plan specifically permits the withdrawal:
- You attain age 59½
- You become incapacable
- It is a 'qualified reservist distribution'
- You experience a hardship (also known as a 'hardship withdrawal')
Hardship withdrawals are only permitted if you have an urgent and substantial financial need, and only up to the amount required to meet that need. In the majority of programs, you must use the funds to:
- Purchase or renovate your primary residence if it was damaged by an unforeseen event (e.g., a hurricane).
- Avoid evictions and foreclosures
- Pay medical expenses for yourself, your spouse, your children, or plan beneficiaries.
- Pay specific funeral expenses for your parents, spouse, dependent children, or plan beneficiary.
- Pay for certain education expenses for yourself, your spouse, your offspring, or a plan beneficiary.
- Pay any income tax and/or penalties owed on the withdrawal itself.
With the exception of certain pre-1989 quantities that were grandfathered in, investment earnings are not available for hardship withdrawals.
In addition to the tax consequences described below, clients of University of California should also consider the disadvantages associated with hardship withdrawals. You cannot take a hardship withdrawal until you have withdrawn all other funds and taken all nontaxable plan loans from all retirement plans that University of California may potentially maintain. And, in the majority of 401(k) plans, the employer, such as University of California, is required to suspend your participation in the plan for at least six months after the withdrawal, meaning you could lose out on potentially valuable University of California matching contributions. Hardship withdrawals are not eligible for rollover. Therefore, University of California employees should closely consider a hardship withdrawal before making one.
Withdrawing employer contributions
Obtaining employer contributions from a 401(k) plan can be even more difficult. While some plans prohibit you from withdrawing any employer contributions prior to employment termination, others are more accommodating and permit you to withdraw at least some vested employer contributions. Contributions that have been 'vested' cannot be forfeited under any circumstances. In general, a 401(k) plan may permit you to withdraw company matching and profit-sharing contributions that have vested if:
- You become incapacable
- Your employer has some discretion regarding the definition of hardship for this purpose.
- You reach a certain age (for example, 59 12)
- You have participated for at least five years, or
- Generally, the employer contribution has been in the account for a minimum of two years.
Taxation
When you withdraw from your retirement plan, your own pretax contributions, company contributions, and investment earnings are subject to income tax. Contributions made after taxes will be exempt from taxation when withdrawn. Each withdrawal is presumed to include a proportional amount of taxable and nontaxable funds.
Your Roth contributions and investment earnings on them are taxed separately: if your distribution is 'qualified,' it will be completely exempt from federal income tax. If your withdrawal is 'nonqualified,' each withdrawal will be treated as a proportional distribution of your nontaxable Roth contributions and taxable investment earnings. A distribution is qualified if a five-year holding period is satisfied and the distribution is made after reaching age 5912 or becoming disabled. The five-year period commences on January 1 of the year in which you make your first Roth 401(k) contribution.
Unless an exception applies, the taxable portion of your distribution may be subject to a 10% premature distribution tax in addition to any income tax due. Distributions after age 5912, distributions due to disability, qualified reservist distributions, and distributions to pay medical expenses are exempt from the penalty.
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Rollovers and conversions Rollover of non-Roth funds
If your in-service withdrawal qualifies as a 'eligible rollover distribution,' you may transfer over all or a portion of it tax-free into a traditional IRA or another potential University of California plan that accepts rollovers. In general, the majority of in-service withdrawals are eligible for rollover, with the exception of hardship withdrawals and required minimum distributions after age 7012. If your withdrawal qualifies as a qualified rollover distribution, your plan administrator will provide you with a notice (a '402(f) notice') that explains the rollover rules, the withholding rules, and other tax considerations. (Your plan administrator will withhold 20% of the taxable portion of your eligible rollover distribution for federal income tax purposes if you do not rollover the funds immediately to another plan or IRA.)
You can also turn over ('convert') an eligible non-Roth rollover distribution into a Roth IRA. Some 401(k) plans even permit a 'in-plan conversion' in which you can request an in-service withdrawal of non-Roth funds and have them transferred into a Roth account within the same 401(k) plan. In either instance, you will be subject to income tax on the converted amount (less any nontaxable after-tax contributions).
Rollover of Roth funds
If you withdraw money from your Roth 401(k), you can only transfer it over to a Roth IRA or another Roth 401(k)/403(b)/457(b) plan that accepts rollovers. (Once more, hardship withdrawals are unable to be carried over.) But be careful to comprehend how a rollover will affect the taxation of future IRA or plan distributions. For instance, if you transfer over a nonqualified distribution from a Roth 401(k) to a Roth IRA, the Roth IRA's five-year holding period will be used to determine if future distributions from the IRA are tax-free qualified distributions. That is, you will not receive credit for the time these funds were invested in your
Be informed
We advise our University of California clients to familiarize themselves with the terms of University of California's potential 401(k) plan in order to comprehend their specific withdrawal rights. The summary plan description (SPD) is an excellent starting point. University of California will provide you with a copy of the SPD within 90 days of your plan enrollment.
Conclusion
Retirement planning is like a puzzle. Just as a puzzle requires different pieces that fit together to create a complete picture, retirement planning requires a variety of financial and lifestyle considerations that work together to create a fulfilling post-career life. This article offers valuable insights and guidance to help University of California workers looking to retire, as well as existing retirees, put the pieces of their retirement puzzle together. From managing debt and creating a budget to investing for the future and planning for long-term care, this article provides a comprehensive framework for achieving a successful and satisfying retirement.
How does the University of California Retirement Plan (UCRP) define service credit for members, and how does it impact retirement benefits? In what ways can University of California employees potentially enhance their service credit, thereby influencing their retirement income upon leaving the University of California?
Service Credit in UCRP: Service credit is essential in determining retirement eligibility and the amount of retirement benefits for University of California employees. It is based on the period of employment in an eligible position and covered compensation during that time. Employees earn service credit proportionate to their work time, and unused sick leave can convert to additional service credit upon retirement. Employees can enhance their service credit through methods like purchasing service credit for unpaid leaves or sabbatical periods(University of Californi…).
Regarding the contribution limits for the University of California’s defined contribution plans, how do these limits for 2024 compare to previous years, and what implications do they have for current employees of the University of California in their retirement planning strategies? How can understanding these limits lead University of California employees to make more informed decisions about their retirement savings?
Contribution Limits for UC Defined Contribution Plans in 2024: Contribution limits for defined contribution plans, such as the University of California's DC Plan, often adjust yearly due to IRS regulations. Increases in these limits allow employees to maximize their retirement savings. For 2024, employees can compare the current limits with previous years to understand how much they can contribute tax-deferred, potentially increasing their long-term savings and tax advantages(University of Californi…).
What are the eligibility criteria for the various death benefits associated with the University of California Retirement Plan? Specifically, how does being married or in a domestic partnership influence the eligibility of beneficiaries for University of California employees' retirement and survivor benefits?
Eligibility for UCRP Death Benefits: Death benefits under UCRP depend on factors like length of service, eligibility to retire, and marital or domestic partnership status. Being married or in a registered domestic partnership allows a spouse or partner to receive survivor benefits, which might include lifetime income. In some cases, other beneficiaries like children or dependent parents may be eligible(University of Californi…).
In the context of retirement planning for University of California employees, what are the tax implications associated with rolling over benefits from their defined benefit plan to an individual retirement account (IRA)? How do these rules differ depending on whether the employee chooses a direct rollover or receives a distribution first before rolling it over into an IRA?
Tax Implications of Rolling Over UCRP Benefits: Rolling over benefits from UCRP to an IRA can offer tax advantages. A direct rollover avoids immediate taxes, while receiving a distribution first and rolling it into an IRA later may result in withholding and potential penalties. UC employees should consult tax professionals to ensure they follow the IRS rules that suit their financial goals(University of Californi…).
What are the different payment options available to University of California retirees when selecting their retirement income, and how does choosing a contingent annuitant affect their monthly benefit amount? What factors should University of California employees consider when deciding on the best payment option for their individual financial situations?
Retirement Payment Options: UC retirees can choose from various payment options, including a single life annuity or joint life annuity with a contingent annuitant. Selecting a contingent annuitant reduces the retiree's monthly income but provides benefits for another person after their death. Factors like age, life expectancy, and financial needs should guide this decision(University of Californi…).
What steps must University of California employees take to prepare for retirement regarding their defined contribution accounts, and how can they efficiently consolidate their benefits? In what ways does the process of managing multiple accounts influence the overall financial health of employees during their retirement?
Preparation for Retirement: UC employees nearing retirement must evaluate their defined contribution accounts and consider consolidating their benefits for easier management. Properly managing multiple accounts ensures they can maximize their income and minimize fees, thus contributing to their financial health during retirement(University of Californi…).
How do the rules around capital accumulation payments (CAP) impact University of California employees, and what choices do they have regarding their payment structures upon retirement? What considerations might encourage a University of California employee to opt for a lump-sum cashout versus a traditional monthly pension distribution?
Capital Accumulation Payments (CAP): CAP is a supplemental benefit that certain UCRP members receive upon leaving the University. UC employees can choose between a lump sum cashout or a traditional monthly pension. Those considering a lump sum might prefer immediate access to funds, but the traditional option offers ongoing, stable income(University of Californi…)(University of Californi…).
As a University of California employee planning for retirement, what resources are available for understanding and navigating the complexities of the retirement benefits offered? How can University of California employees make use of online platforms or contact university representatives for personalized assistance regarding their retirement plans?
Resources for UC Employees' Retirement Planning: UC offers extensive online resources, such as UCnet and UCRAYS, where employees can manage their retirement plans. Personalized assistance is also available through local benefits offices and the UC Retirement Administration Service Center(University of Californi…).
What unique challenges do University of California employees face with regard to healthcare and retirement planning, particularly in terms of post-retirement health benefits? How do these benefits compare to other state retirement systems, and what should employees of the University of California be aware of when planning for their medical expenses after retirement?
Healthcare and Retirement Planning Challenges: Post-retirement healthcare benefits are crucial for UC employees, especially as healthcare costs rise. UC’s retirement health benefits offer significant support, often more comprehensive than other state systems. However, employees should still prepare for potential gaps and rising costs in their post-retirement planning(University of Californi…).
How can University of California employees initiate contact to learn more about their retirement benefits, and what specific information should they request when reaching out? What methods of communication are recommended for efficient resolution of inquiries related to their retirement plans within the University of California system?
Contacting UC for Retirement Information: UC employees can contact the UC Retirement Administration Service Center for assistance with retirement benefits. It is recommended to request information on service credits, pension benefits, and health benefits. Communication via the UCRAYS platform ensures secure and efficient resolution of inquiries(University of Californi…).
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