Lump-Sum Distributions

Spending All or Part of Your Retirement Savings

Stop: Read Before You Proceed

Like most other retirement plans, when you terminate employment from a CCOERA-member jurisdiction, you are eligible to receive the money in your retirement account in cash. While it may be tempting to access part of the money in your retirement account to pay bills, purchase something you've desired for some time, or take an expensive vacation, remember how difficult it was to accumulate. You'll also want to consider the consequences of potential tax penalties levied on early withdrawals, as well as federal and state income taxes.

But wait - there's still more to consider. In addition to paying income taxes, your withdrawal may severely alter the quality of your retirement, and/or end up working longer than you anticipated. Taking the money in your retirement account in cash now, will cause you to take two steps backwards in reaching your retirement goals. First, you lose the advantage of tax-deferred growth and compounding on the money that you've already accumulated; second, you'll have to make up for it by saving substantially more in the future. Review the material on the following pages to help you make an informed decision.

Worksheet:  How Much Tax Will I Pay?

Spend the Non-Taxable Amounts

The majority of CCOERA participants will not have any available Non-Taxable amounts in their CCOERA Retirement Plan account, because most contributions to the plan are made on a pre-tax basis, allowing you to take advantage of the immediate tax benefits allowed by IRS. However, in some cases, your employer may have elected to deduct Mandatory Employee After-Tax Contributions on an after-tax basis, meaning taxes were paid prior to making the contributions. Additionally, some participants may have elected to make Voluntary After-Tax Contributions to the CCOERA Retirement Plan, of which taxes were also paid prior to making the contribution. As a result, income taxes and penalties are not assessed on the amount of these types of contributions when they are withdrawn from the plan, because taxes were paid in advance. Remember however, the earnings on these contributions are subject to the same taxes and penalties as all other taxable amounts, because taxes on earnings are deferred until withdrawal.

Procedure:
To obtain only the Non-Taxable amount from your CCOERA Retirement Plan account, you will need to take a complete distribution of your after-tax contributions (including the related earnings), and then rollover the taxable earnings portion to an IRA, to postpone the taxes on these earnings.

Benefits of Spending Only the Non-Taxable Amount of Your CCOERA Retirement Plan

  • Satisfy Emergency Financial Needs
  • Postpone Taxes and Penalties on Taxable Amounts
  • Avoid Early Withdrawal Penalties
  • Continued Growth

Downside of Spending Only the Non-Taxable Amount of Your CCOERA Retirement Plan

  • Erosion of Your Retirement Savings

Spend Your Deferred Compensation Money

If you have taken advantage of the opportunity to make voluntary contributions to a deferred compensation plan, you have accumulated money in an account that offers special tax treatment to employees of state or local governments. You will not pay a 10% early withdrawal penalty, regardless of your age at the time of distribution. Remember though a distribution from a deferred compensation plan is subject to ordinary income tax.

Procedure:
To withdraw all or a portion of your CCOERA Deferred Compensation Plan account, you will need to complete the corresponding  Separation From Employment Withdrawal Request Form (remember, 20% will be withheld for federal income taxes).

Benefits of Spending Your Deferred Compensation Money

  • Satisfy Emergency Financial Needs
  • Avoid Early Withdrawal Penalties

Downside of Spending Your Deferred Compensation Money

  • Erosion of Your Retirement Savings
  • Income Taxes

 

Spend Part of Your Retirement Savings

If you have exhausted all other resources, and using the money in your retirement account is your only alternative, consider taking only an amount absolutely necessary to meet existing emergency financial needs. The balance of your account can be rolled over into an IRA, left to grow tax-deferred for retirement.

 

Procedure:
To withdraw a portion of your CCOERA Retirement Plan or CCOERA Deferred Compensation Plan account(s), you will need to complete the corresponding Separation From Employment Withdrawal Request Form (remember, 20% will be withheld for federal income taxes).

Spend All Of Your Retirement Savings Now

When you terminate employment you are eligible to receive all of the money in your retirement account in one lump sum. However, spending all of the money in your retirement account comes with serious repercussions. In addition to costly taxes and potential penalties, you may severely alter your ability to achieve your retirement dreams. In some cases, depending on your age and other factors, you may not have enough time or resources to recover from such an action.

Prior to making a decision to spend the money in your retirement account(s), confirm that you have explored all other alternatives, including borrowing from another source, such as a home equity loan. Also, make sure that you fully understand all of the consequences, including taxes, penalties, and the likelihood that you can make up for the partial or complete depletion of your retirement savings.

Procedure:

To withdraw all of your CCOERA Retirement Plan or CCOERA Deferred Compensation Plan account(s), you will need to complete the corresponding Separation From Employment Withdrawal Request Form (remember, 20% will be withheld for federal income taxes).

Benefits of Spending All of Your CCOERA Retirement Savings

  • Satisfy Emergency Financial Needs

Downside of Spending All of Your CCOERA Retirement Savings

  • Erosion of Your Retirement Savings
  • Income Taxes
  • Potential Early Withdrawal Penalty