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You have several options when taking distributions
from your retirement account. Consult a financial
planning professional or tax accountant for guidance
before you make any decisions.
Take all the money in a lump sum.
Taking your retirement account in a lump sum is
usually not advisable. You will be subject to
federal income taxes on the entire amount, and
you lose the tax-deferred status of the account.
Take an income annuity with payments over
your lifetime or some other period. This may
be your only choice in a defined benefit pension
plan or government retirement plan. You can also
use the funds from your retirement account to buy
an income annuity. Payments are based either on
your life expectancy or the joint life expectancy
of you and your spouse. Annuity payments are taxed
as ordinary income.
Rollover the distribution into another account.
Rollovers are tax-free transfers from one retirement
plan to another. If you withdraw the funds from one
retirement account yourself and then put them into
another account, 20 percent of the distribution will
be withheld for federal income tax purposes and you
have only 60 days to make the rollover. A far better
alternative that avoids tax withholding is a direct
rollover, the movement of funds directly from one
plan to another.
Do a combination of these actions. You
may need to withdraw part of your funds to buy a
home or establish a business. While you are generally
subject to federal income tax on the amount withdrawn,
the money left in the account continues to grow tax-deferred.
| Advantages Of Rollovers |
- They preserve the tax-deferred status of your funds.
- A rollover to an IRA gives you flexibility in choosing
investments that you might not have with an employer’s plan.
- If your previous plan was invested only in your employer’s
stock or a limited number of investment choices, a rollover
allows you to diversify your investments.
- You may gain more control over your funds.
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Basic Money Management
Basic Money Management
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