Unemployment Compensation Amendments of 1992
The Unemployment Compensation Amendments of 1992 in the United States allow an employee who loses their job to roll over their employer-sponsored retirement savings into a qualified retirement plan without tax consequences. Former employees can do this through amendments to the Emergency Unemployment Compensation Act of 1991, which extended emergency unemployment benefits.
Key Takeaways:
– The Unemployment Compensation Amendments of 1992 allow employees to roll over their retirement savings into an individual retirement account (IRA) or other qualified retirement plan without tax consequences.
– Employers must provide the option of a direct transfer to the new account.
– Direct transfers are not considered taxable income.
– Employees who choose to receive funds directly are subject to a 20% withholding tax.
Understanding the Unemployment Compensation Amendments of 1992:
Under these amendments, if you lose your job, your employer must give you the option of rolling over your retirement savings into an IRA or other qualified retirement plan. The law allows for trustee-to-trustee transfers, in which the funds are transferred on your behalf without taxes withheld. If you choose to receive the funds as a check, a mandatory 20% withholding tax will be applied. It is advisable to avoid withdrawing funds as a lump sum before age 59½ to avoid tax penalties and diminish your retirement savings’ growth potential.
Special Considerations:
Most 401(k) plans allow an employer to cash out accounts with less than $1,000 or put $1,000 to $5,000 into an IRA if no instructions are given. Leaving your retirement savings with your old employer may restrict further contributions. Transferring your savings to an IRA provides a wider range of investment options compared to employer plans, which typically offer limited mutual fund choices.
