Cashing In Your Retirement
For years you've been putting away money in a qualified retirement plan. One day it happens: you're ready to leave the company with a sizable amount socked away in your account.
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What do you do when this "once in a lifetime" opportunity arises? Here are four basic options:
- Take your "lumps" now and invest for the future.
- Spread out the payments over time.
- Leave the money where it is.
- Roll over and plan for more time.
If you receive a lump-sum distribution from the plan, the payout will be taxable at your highest marginal tax rate. As a general rule, you must pay a 10% penalty on the taxable portion of the distribution if you receive the money before turning age 591/2 (unless an exception applies).You can, however, reduce the tax bite through "income averaging."
If you were born before 1936, you can elect ten-year averaging computed under 1986 tax rates, including the potential for special capital gain treatment. Note: five-year averaging is no longer available for distributions made after 1999.
By choosing to receive a series of payments instead of a lump sum, you effectively spread out the tax over time. Typically, the payments are based on your life expectancy or the joint life expectancies of you and your spouse. The payments end upon the death of the surviving spouse.
If your current plan permits it, you can leave the money in the plan where it will continue to grow without current tax, until you are ready to use it. However, it may be difficult to manage the funds or gain access to them - especially if you've left the company on bad terms.
This is the most popular choice. You can "roll over" part or all of your account balance to an IRA. If the rollover is completed within 60 days there's no tax on the transfer. The money will continue to grow tax-deferred until you are ready to begin withdrawals.
The most important factor in rolling over your retirement plan into an IRA is that you now have total control of your money, and the investments. Note: income averaging is not available on IRA distributions.
When you get ready to retire or change jobs, make sure you work with a financial professional who can help you decide the best option for your particular situation.
Remember that you want your money to work as hard for you, as you work for your money.
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