The Mechanics of Moving Money

Bill Parrott |

For the past forty years or so, you’ve worked hard and, hopefully, saved a few dollars. While working, you probably contributed a portion of your pay to your 401(k), IRA, or investment accounts. Now what? Yesterday you were working, today you’re retired. It’s now time to enjoy the fruits of your labor.

A question I’m often asked is: “How do I take money out of my retirement accounts?”

The mechanics of moving money from your company-sponsored retirement plan to an IRA is a simple process. The transfer will occur on a trustee to trustee basis, so you won’t have to pay any fees, penalties, or taxes. To start the rollover process, you’ll need to contact your employer. They will give you a form or a link to a website to complete the process. Your company custodian will require you to have an IRA account number and mailing address for your new custodian. Once the information is entered, the rollover will be processed, and your money will be transferred to your IRA.

Of course, if you’re happy with your 401(k), you can leave your assets in the plan. You don’t have to roll it over to an IRA if you’re satisfied with your funds, returns, and fees. However, one of the main reasons to rollover your plan is to give you more investment choices.

What if you want to cash out of your plan and receive a big check? A lump-sum payout is an option, not a wise one, but it’s an option. Let’s say your current 401(k) balance is $1 million, and you decide to cash out and receive a lump-sum check. The distribution would be taxed as income at the state and federal level. If you live in California, 50.9% (39.6% for federal, 11.3% for state) of this distribution will be eaten up by taxes.

Once your funds have been deposited into your IRA, the process of moving money from your retirement account to your bank is also a simple process. Most people opt to have their money transferred electronically via an ACH (automated clearinghouse) transaction. The distributions can occur monthly, quarterly, annually, or as needed. Your income-distribution options are limitless.

Let’s look at a few pay-out options.

During a certain month, you may receive dividends and interest payments from several sources. At the end of the month we can total the amount and send the check to your bank. Your monthly income checks will be sporadic if you employ this strategy, especially if you own a large quantity of individual stocks and bonds.

Another option is to pay ’em as you get ’em. For example, if you receive a dividend payment from Pepsi today, we can send you the check tomorrow. This option is rarely chosen because of the volume of checks.

The option most retirees choose is to receive a flat dollar amount regardless of how much income the investments generate monthly. For example, let’s say you want to receive $5,000 per month. At the beginning of each month you’ll receive $5,000 regardless of how much income was generated in your account. This is a popular strategy because it helps with the budgeting process.

What about taxes? When you remove money from your traditional IRA account, or any tax-deferred account, you’ll owe taxes on the distribution. Let’s say you want to receive $5,000 per month or $60,000 a year. After consulting with your CPA, you decide to withhold 20% from each check to cover the tax. You’ll receive $4,000 and $1,000 will be sent to the IRS. At the end of the year, your 1099-R will reflect $60,000 in total distributions – $48,000 to you, $12,000 to the IRS.

For forty years you automatically deposited money into your 401(k). Now that you’re retired, we will establish an automated systematic withdrawal, so you can receive monthly income and enjoy life!

Often when you think you’re at the end of something, you’re at the beginning of something else. ~ Fred Rogers


Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.