- Retirement Plan Distributions Options.
When it comes to receiving the fruits of your labor — the money accumulated in your employer-sponsored retirement plan — you are
faced with extensive options. Should you take the payout as systematic payments, a lifetime annuity, or a lump sum? The answer
depends on your own unique situation. Below are some options.
Systematic Withdrawals
Some retirement plans may allow you to take systematic withdrawals: either a fixed dollar amount on a regular schedule, a specific
percentage of the account value on a regular schedule, or the total value of the account in equal distributions over a specified period of
time.
The Lifetime Annuity Option
Your retirement plan may allow you to take payouts as a lifetime annuity, which converts your account balance into guaranteed monthly
payments based on your life expectancy. If you live longer than expected, the payments continue anyway.
There are several advantages associated with this payout method. It helps you avoid the temptation to spend a significant amount of
your assets at one time and the pressure to invest a large sum of money that might not last for the rest of your life. Also, there is no large
initial tax bill on your entire nest egg; each monthly payment is taxed incrementally as ordinary income.
If you are married, you may have the option to elect a joint and survivor annuity. This would result in a lower monthly retirement payment
than the single annuity option, but your spouse would continue to receive a portion of your retirement income after your death. If you do
not elect an annuity with a survivor option, your monthly payments end with your death.
The main disadvantage of the annuity option lies in the potential reduction of spending power over time. Annuity payments are not
indexed for inflation. If we experienced a 4% annual inflation rate, the purchasing power of the fixed monthly payment would be halved in
18 years.
Lump-Sum Distribution
If you elect to take the money from your employer-sponsored retirement plan as a single lump sum, you would receive the entire vested
account balance in one payment, which you can invest and use as you see fit. You would retain control of the principal and could use it
whenever and however you wish.
Of course, if you choose a lump sum, you will have to pay ordinary income taxes on the total amount of the distribution in one year. A
large distribution could easily move you into a higher tax bracket. Another consideration is the 20% withholding rule: Employers issuing
a check for a lump-sum distribution are required to withhold 20% toward federal income taxes. Thus, you would receive only 80% of your
account balance, not 100%. Distributions taken prior to age 59½ are also subject to a 10% federal income tax penalty.
To avoid some of these problems, you might choose to take a partial lump-sum distribution and roll the balance of the funds directly to
an IRA or other qualified retirement plan in order to maintain the tax-deferred status of the funds. An IRA rollover might provide you with
more options, not only in how you choose to invest the funds but also in how you access the funds over time.
Remember that after you reach age 70½, you must begin taking required minimum distributions from traditional IRAs and most
employer-sponsored retirement plans. These distributions are taxed as ordinary income.
Before you take any action on retirement plan distributions, it would be prudent to consult with a tax professional regarding your
particular situation. Choose carefully, because your decision and the consequences will remain with you for life.
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Note: The information provided here is to assist you in financial planning and understanding types of life insurance. The
information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any
federal tax penalties. You are encouraged to seek tax or legal advice from a professional and licensed tax or legal advisor.
As with most financial decisions, there are associated expenses with the purchase of life insurance. Policies commonly have
contract limitations, fees, and charges, which can include mortality and expense charges. Most have surrender charges that
are assessed during the early years of the contract if the contract owner surrenders the policy; plus, there could be income
tax implications. Any guarantees are contingent on the claims-paying ability of the issuing company. Life insurance is not
guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed
by, any bank or savings association.
information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any
federal tax penalties. You are encouraged to seek tax or legal advice from a professional and licensed tax or legal advisor.
As with most financial decisions, there are associated expenses with the purchase of life insurance. Policies commonly have
contract limitations, fees, and charges, which can include mortality and expense charges. Most have surrender charges that
are assessed during the early years of the contract if the contract owner surrenders the policy; plus, there could be income
tax implications. Any guarantees are contingent on the claims-paying ability of the issuing company. Life insurance is not
guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed
by, any bank or savings association.
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