LUMP SUM
DISTRIBUTION TAXATION ALTERNATIVES
1. Elect to treat the entire distribution as ordinary
income, add this income to all other sources of income, and pay taxes on the sum at
regular tax rates. For most,
not a very advantageous or smart choice. Or,
2. Pay taxes immediately on the taxable portion of the
distribution pursuant to the Special 10-Year or 5-Year Averaging. If you were age 50 by
January 1, 1986 you may elect either 10-Year or 5-Year one time. If you were not age 50 by
January 1, 1986 then you are only entitled to a one time 5-Year averaging method.
3. If you were age 50 on January 1, 1986 then you may
elect to separate the ordinary income and capital gains portions of the distribution and
use Special 10-Year Averaging on the ordinary income portion. The taxable portion of the
long-term capital gain is taxed at a 20% tax rate. Add the total of the two taxes for your
total tax liability. (Watch out for triggering the Alternative Minimum Tax under this
method.)
*4. Elect to rollover a portion or all of the qualified
distribution, tax-free, to an IRA. Any remaining balance must be taxed along with other
ordinary income.
AXIOM: The greater the need for income and resources
from your Qualified Plan distribution in the early years following retirement, the greater
the probability that you will be better off by taking applicable 5 or 10 year averaging.
Conversely, the less likely you are to need a lot of cash or assets out of your Qualified
Plan distribution in the early years following retirement then the more likely you are to
be well served by utilizing the IRA rollover method. Accordingly, the need to use assets
for large home improvements, expansions, a new home or other significant asset purchases
or large expenditures in the early years after retirement will usually impinge upon the
advisability to utilize the otherwise attractive IRA rollover option.
CONCLUSION
You have worked hard all your life for your retirement.
The IRS, however, only provides you with a 60 day window of opportunity to decide which of
the above alternatives you wish to use. Carefully calculate and compare the results of all
your alternatives!
How to treat your lump sum distribution will be one of
the most important decisions you will have to make for the rest of your life. Most any
competent tax advisor can tell you which method will net you the least immediate income
tax, but only a thorough objective analysis can help you determine which method actually
produces the greatest economic benefit over your lifetime within the scope of your overall
affairs. Knowledgeable experienced assistance with your Required
Minimum Distributions will also be of great importance.
*REMEMBER: You must make a direct
transfer of your distribution to a pre-existing IRA in order to avoid the 20% TEFRA
withholding tax!!!
IT IS EXTREMELY IMPORTANT TO SEEK QUALIFIED AND
OBJECTIVE PROFESSIONAL GUIDANCE WHEN DEALING WITH YOUR LUMP SUM DISTRIBUTION. FOR FURTHER
ASSISTANCE, E MAIL US YOUR INQUIRY AT advisors@gfcwow.com or simply call us at
316-636-5511.
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