- Introduction
- What Initiates a Distribution?
- Five Dates You Should Know
- Selecting a Distribution Option
- Deciding on a Payout Option
- Annuity Form of Payout
- Advantages and Disadvantages of Taking an Annuity
- Taking a Lump-Sum Distribution: Know Your Options
- Annuity vs. Managing Your Own Retirement Assets
- Advantages and Disadvantages of a Lump-Sum Distribution
- The Roth IRA–How Does It Fit In?
- Making the Decision: Annuity or Lump-Sum?
- Taxation of Distribution Options
- Rollover into a Traditional IRA
- Advantages and Disadvantages of Rollover to a Traditional IRA
- Annuity Payouts
- Early Distributions
- Should You Defer Your Retirement Plan Distribution as Long as Possible?
- Distributions Following Death
Your choices of distribution of your retirement benefits generally include a lump-sum distribution, an annuity, or rollover to a traditional IRA or a new employer's qualified plan. Each of these distribution methods has different federal income tax requirements; an understanding of these will contribute to your decision of how to take your distribution.
You may want or need to take an early distribution of your retirement benefits, but you should be aware of the tax implications and possible penalties before you make this decision. Alternatively, you may want to defer your retirement plan distribution; you can do this for a time before minimum distribution requirements kick in.
If, after exploring these sections, you still have questions on the tax consequences of your distribution option choices, call your tax professional for assistance.
Lump-Sum Distributions
Some retirement plans offer only a lump-sum payout at retirement. In this case, is it better to pay taxes at distribution or defer taxes by rolling over the amount into a traditional IRA? A traditional IRA can serve as a place to continue the tax-deferred sheltering of money from your employer retirement plans. If you have your employer plan transfer the money directly into a traditional IRA, i.e., a direct rollover, no taxes are due until you begin to withdraw the money.
A lump-sum distribution is a distribution of all the money in your retirement plan in one large lump-sum. A payment qualifies as a lump-sum distribution if it meets the following requirements:
- The distribution is payable on account of death, attainment of age 59½, or separation from service.
- All the contributions and earnings in all your qualified retirement plans (i.e., pension, profit-sharing, or stock bonus plans) are paid out.
- The payment is made in one taxable year.
You will generally have three choices if you go this route:
- You can roll all or part of it into a traditional IRA or Keogh or other qualified plan within 60 days and defer paying income tax.
- You can convert a traditional IRA into a Roth IRA. You are required to pay tax on the deductible and pre-tax contributions and any earnings on the date of the conversion. The 10% early distribution penalty does not apply on the conversion.
- You can decide to keep money and pay income tax on it.
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