KNOW HOW TO TAKE YOUR LUMPS
KNOW HOW TO TAKE YOUR LUMPS
If you are about to retire or change jobs, or if your employer
is terminating the company retirement plan, you may be eligible
to receive a "lump sum distribution" as defined in the Internal
Revenue Code. Such a distribution may be substantial and may
represent the cornerstone of your retirement security. So it is
important to consider your options carefully before making a
decision regarding distributions.
Basically, you are faced with two main options. Should you take
a direct distribution and pay your taxes now? Or should you roll
your distribution over into a traditional Individual Retirement
Account (IRA)?
If you decide not to roll the distribution over into a
traditional IRA, you must pay tax on the distribution in the
year you receive it. You will, of course, be able to invest the
remainder as you please. The main benefit of paying taxes on
your distribution now is that you may be eligible for special
tax treatment. If you were born before 1936, you may be eligible
for ten-year tax-averaging on your lump sum distribution. Or, if
your distribution will include shares of your employer's stock,
a portion of your distribution may be eligible for the new lower
capital gains tax treatment. If either of these situations
exists, you may be able to pay a lower tax rate than usual on
your distribution. If not, your distribution may be taxed at
your ordinary income tax rate so you may want to consider your
second option.
Your second option is to roll the distribution over into a
traditional IRA. This alternative assures that assets will
continue to enjoy tax-deferred growth to provide for your
retirement. Under current IRS regulations, you need not begin
taking distributions from your traditional IRA until you reach
age 70 1/2.
Here are some facts to keep in mind when faced with the
distribution decision.
* Only 60 days are permitted between the receipt of your lump
sum distribution and the date of the roll over. * All
contributions (pre- and after-tax) and earnings distributed from
the employer's qualified plan may be rolled over. * Regardless
of whether it is deductible, it is still possible to make an
annual $4,000 (for 2006) IRA contribution, plus a $1,000
catch-up for those who have attained age 50, to a traditional or
Roth IRA account. * Contributions to the IRA may only be made in
cash; but, with a rollover transaction, if non-cash assets are
received as part of the distribution, they may be rolled into
the IRA (e.g. employer stock or mutual fund shares). *
Distributions may be made from a traditional IRA account at any
time after age 59 1/2 free of penalty.
The traditional IRA account provides you with an opportunity to
continue building assets during working years through continued
tax-deferred compounding. There will be no tax implications
until you begin to take distributions. This continued
tax-deferred growth could mean the difference between your
living simply or living well during your "golden years." Of
course, before you decide which strategy best meets your
objectives, it is a good idea to consult with your financial and
tax advisors.