Making wise decisions about distributions from retirement plans can make a large difference in your financial future. Often a 401(k) plan distribution received when leaving changing jobs represents the largest single sum of money one ever receives. Deciding what to do about the distribution can be confusing and stressful. Most retirement plans have provisions that may effect some options on distribution. The specific actions you should take should be based on the options you have and your financial objectives.

There are three major decisions to make about a distribution:

• Do you want to pay tax on it now or have it remain tax-deferred?
• Do you want to leave your funds with your prior employer's plan, move them it to your new employer's plan or transfer them to an IRA?
• How do you want the money invested?

Pay taxes or not
The earnings on balances within a qualified plan are tax deferred. Income tax is only due when funds are withdrawn. If you receive a distribution, rolling the funds into an IRA can enable you to continue the tax deferral. Taking the distribution can result in ordinary income taxes and a 10% early withdrawal penalty tax if you are under the age of 59 ½. Generally speaking, if you don't need the money, it is usually advisable to maintain the tax deferral status.

Where to keep your funds
To maintain tax deferral, funds must stay in some form of qualified retirement plan. Many retirement plans allow you to leave funds in the plan after employment termination. You may also be eligible to transfer the distribution to a new employer's plan. The third option is to transfer the funds to an IRA. The choice of where to have your money should be based on the amount of investment control you wish. An IRA probably provides the most flexibility, but also forces you to make more decisions. Costs of administration and asset management should also be considered.

Investing your funds
Your distribution and other retirement plan assets will probably be a key factor in determining your retirement financial lifestyle. Your funds should be put to work to fit your risk tolerance and time constrictions. The proper asset allocation takes those issues into account.

Decide wisely
The financial lifestyle of your retirement years will be affected by the decisions you make with your retirement plan assets. When you receive a distribution when you retire or change jobs, be sure to evaluate all your options, seek guidance if needed and decide wisely. Your future financial security depends on it.