Your DROP distribution is generally 100% taxable at your income tax rate.
- Your employer is required by federal law to withhold 20% of your eligible rollover distribution for payment of income tax.
The Rollover Decision
With a rollover to another eligible retirement plan, your funds will continue to grow tax deferred, until distributed from the plan as, for example, a required minimum distribution or a partial withdrawal. That means your DROP funds can continue to go to work for you. However, the taxable portion of an eligible rollover distribution is subject to the 20% mandatory federal withholding requirement. Rollovers completed by direct rollover are not subject to the 20% mandatory federal withholding requirement, nor are distributions not eligible for rollover (such as required minimum distributions) or distributions from IRA based plans.
Distributions not subject to the 20% mandatory federal withholding requirement (other than direct rollovers/transfers) are subject to other federal withholding requirements, unless the taxpayer is eligible to and elects out of such federal withholding. State withholding may also apply to distributions from qualified retirement plans and IRAs. Distributions of taxable amounts are subject to ordinary income taxes and, if made before age 59 1/2, may be subject to a 10% federal income tax penalty.
Consider the following when deciding which retirement plan funding product to choose:
- Think long term - Life expectancies are increasing and you don't want to outlive your assets. Explore ways to generate income at retirement that could last for the rest of your life.
- Make the most of tax advantages - The government wants you to plan for your financial future. That's why there are a number of tax-advantaged plans and investments available to you that allow you to accumulate your retirement savings using tax-deferral.
- Go for growth potential - You would not buy a home if you did not think it would appreciate in value. You should consider taking the same attitude with your long-term investments, making sure they align with your financial objectives and risk profile.
- Diversify - One of the best ways to help manage risk is to diversify among asset classes, investment style and types of securities. Make sure your investments do not react the same way to market and economic conditions.
- Stay focused and disciplined - A blueprint for a more successful retirement often involves staying focused and disciplined. Consider financial products that provide flexibility and features that enhance your plan.
- Work with a solid company - After all, planning for any substantial goal could require years of commitment. You need a financial services company as committed as you are to help you realize your dreams.
MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances.
Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor.
