Financial Learning Center
- What Initiates a Distribution?
- Five Dates You Should Know
- Selecting a Distribution Option
- Deciding on a Payout Option
- Annuity Form of Payout
- Advantages and Disadvantages of Taking an Annuity
- Taking a Lump-Sum Distribution: Know Your Options
- Annuity vs. Managing Your Own Retirement Assets
- Advantages and Disadvantages of a Lump-Sum Distribution
- The Roth IRA–How Does It Fit In?
- Making the Decision: Annuity or Lump-Sum?
- Taxation of Distribution Options
- Rollover into a Traditional IRA
- Advantages and Disadvantages of Rollover to a Traditional IRA
- Annuity Payouts
- Early Distributions
- Should You Defer Your Retirement Plan Distribution as Long as Possible?
- Distributions Following Death
- No current taxes due at distribution if a direct rollover.
- Assets are invested in a tax-deferred environment.
- Opportunity to invest the cash that would otherwise go to taxes until ultimate distribution.
- You may convert the traditional IRA to a Roth IRA (however there are potential taxes due from conversion).
- The tax rate on amounts distributed from the IRA may be higher depending on your tax bracket during distribution years.
IMPORTANT NOTE: The higher tax rate paid on IRA distributions may be fully offset by the tax deferral advantage of the IRA environment.
- Long-term gains on equity investments inside the IRA (normally taxed at a maximum rate of 15% outside the IRA for many taxpayers) are taxed at ordinary income tax rates (up to 35%) upon distribution.
If you are receiving a distribution from a retirement account that is eligible to be rolled over and you don't transfer it directly (i.e., a direct rollover to a traditional IRA or other qualified plan), 20% will be withheld to pay for federal income taxes. This is the case even if you eventually roll the funds into a traditional IRA within 60 days of receiving the distribution.
IMPORTANT NOTE: If you don't do a direct rollover, but you do roll over the distribution within 60 days, you won't owe taxes on the amount you roll over. But watch out—you've received only 80% of your distribution (remember 20% was withheld) and thus, you are rolling over only 80%. So you have to come up with the other 20% that was withheld to pay taxes (generally within 60 days) or else, you will be taxed on the 20% you didn't roll over. As long as you roll over the entire retirement distribution, it won't be taxable. You can claim the 20% withholding on your federal income tax return.
SUGGESTION: Elect a direct transfer from your retirement plan to a traditional IRA or other qualified plan to avoid the withholding rule.
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