Lump-sum distribution strategies can pay off

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Thanks to the funds in your 401(k) or other type of employer-sponsored qualified retirement plan, if an individual is retiring or changing careers, he may receive a large chunk of money possibly the biggest he's ever seen. |ret||ret||tab|

That's why it's important not to overlook the need to "map out" a lump-sum distribution strategy to protect the accumulated assets. ideally, it's best to choose a distribution option that meets the retirement needs, minimizes the impact of taxes, and avoids penalties.|ret||ret||tab|

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Option one|ret||ret||tab|

One possible option is to directly roll the entire distribution into another qualified employer plan or individual Retirement Account. A direct rollover to an IRA will avoid income taxes and a 10 percent early withdrawal penalty, as well as the current mandatory 20 percent federal withholding tax that is imposed if the worker elects to receive a check directly from the employer. In an IRA, all earnings continue to accumulate on a tax-deferred basis, allowing money to compound and accumulate quicker than money placed in an identical taxable account.|ret||ret||tab|

To establish a direct rollover IRA, the for-mer employer's plan administrator should be asked in writing to transfer the funds to the trustee of the new qualified plan or IRA. The plan administrator must provide the opportunity to make a direct rollover.|ret||ret||tab|

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Option two|ret||ret||tab|

If the new employer accepts rollovers from another em-ployer's plan, the worker can transfer the funds directly to its 401(k) plan or other type of qualified employer plan, avoiding current income taxes and the 20 percent withholding tax,|ret||ret||tab|

Option three|ret||ret||tab|

The worker may want to keep funds in the employer's plan until reaching the plan's retirement age or age 62, whichever is later, if that is an option. Funds will continue to accumulate tax-deferred and later can be moved to an employer's qualified plan or an IRA without penalty. If the worker is over the plan's retirement age or 62, the company may insist that he take a payout to decrease the plan's administrative costs. If this happens, the worker still has the option to make a direct rollover to an IRA.|ret||ret||tab|

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Option four|ret||ret||tab|

This option allows the worker to receive funds in a distribution that is part of a series of substantially equal periodic payments made at least once a year after separation from service and lasting for:|ret||ret||tab|

the worker's lifetime,|ret||ret||tab|

the worker's lifetime and the beneficiary's lifetime, or|ret||ret||tab|

a period of ten years or more.|ret||ret||tab|

In such situations, the 20 percent withholding rules do not apply. For this reason, this option may be suitable if the worker needs funds to supplement the retirement income. The funds received will be subject to current income taxes. If the worker chooses to receive funds for a period of 10 years or more and is under age 59 1/2, he may be subject to the 10-percent early withdrawal penalty. If already receiving fewer than 10 annual payments, 20 percent of what the worker expected in a given year (and in future years) will be withheld. To avoid this, he can instruct the plan administrator to transfer the payments directly into an IRA. He can then establish a payout schedule to avoid the 10 percent early withdrawal penalty tax.|ret||ret||tab|

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Option five|ret||ret||tab|

Some plans may allow taking a lump-sum distribution in company stock. If the distribution consists of such stock, the mandatory 20 percent withholding tax will not apply.|ret||ret||tab|

The worker will need to pay regular income tax, and may also be subject to the 10 percent early withdrawal penalty if under age 59 1/2. One way to avoid this is to ask the plan trustee to sell the stock and put the proceeds into an IRA within 60 days from the time the lump-sum distribution is received. By doing this, the worker will avoid current income taxes and the early withdrawal penalty.|ret||ret||tab|

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Tax pitfalls|ret||ret||tab|

As the worker "maps out" a distribution strategy, there are a number of potential tax pitfalls to be aware of. Besides the 20 percent mandatory withholding tax, upon distribution current income taxes must be paid on all pre-tax contributions and earnings. And, a 10 percent early withdrawal tax (also known as a premature distribution penalty) will be imposed on the entire distribution if the worker is under age 59 1/2, unless the withdrawal is due to death or disability or taken in substantially equal periodic payments. Certain other exceptions may apply.|ret||ret||tab|

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Make an informed decision|ret||ret||tab|

Be sure to weigh these distribution options carefully. This decision could mean the difference between a dream retirement or one of struggle to meet basic needs.|ret||ret||tab|

|bold_on|(Buckley Van Hooser is an agent for New York Life Insurance Company and a registered representative for NYLIFE Securities Inc.)[[In-content Ad]]