Take a Lump Sum Distribution Although it may be tempting, taking cash from your retirement plan is rarely a good idea. In fact, you may lose nearly half of your hard-earned investments to taxes and penalties!
Watch Out for Uncle SamIf you aren't careful, the IRS could be the biggest beneficiary of your retirement plan investments. Taking a lump sum distribution triggers the mandatory 20% withholding for federal taxes, which means your savings go directly to Uncle Sam. On top of that, a lump sum distribution could bump you into a higher tax bracket that would slap you with even higher state and federal taxes at year-end.1 If you are younger than age 59½, your distribution may also be subject to a 10% early withdrawal penalty.
Taking Cash Can Be CostlyHere's what's left of a $20,000 cash payout:*
Stretch Your Investments InsteadRolling your retirement plan assets into an IRA allows the bulk of your investments to continue growing tax-deferred.
If you've already received a cash distribution from your plan, it may not be too late! You have 60 days to move the money into an IRA or a new qualified employer retirement plan. To avoid all taxes and penalties you will need to make up for the 20% mandatory withholding with out-of-pocket money. You can recover this money when you file your federal tax return.
Advantages of a Lump Sum Distribution
Disadvantages of a Lump Sum Distribution
Rolling your money into an IRA or taking a distribution are just examples of the options you can choose for your old retirement plan. Each option has different advantages, disadvantages, investment options, and fees and expenses, which should be understood and carefully considered. Investing and maintaining assets in an IRA may involve higher costs than those associated with employer-sponsored retirement plans. We recommend that you consult with your current plan administrator before making any decisions regarding your retirement assets.