Fernando has been an attorney in the legal department of Mega Manufacturing, Inc., for the past 15 years. As part of Mega’s restructuring plan, he will lose his job as an employee of Mega, but he will continue contracting with Mega to work on specific engagements as a self-employed attorney.
Fernando is concerned about protecting his retirement assets. He has $200,000 vested in Mega’s qualified retirement plan. Mega made the contributions to the retirement plan as part of its defined contribution plan. When Fernando leaves the company, he can request that his funds be withdrawn and paid to him in cash or to the administrator of a designated qualified retirement program. Fernando wants to continue saving for his retirement when he becomes self-employed.
What are the tax consequences of the distribution from the Mega retirement plan?