Life Events

Once you decide to take money out of an IRA or employer plan, how you do it matters. The wrong move can create an unnecessary tax bill, while a careful one can keep more of your savings working for you.

Lump sum, rollover or periodic payments

When you leave an employer or retire, you generally have three choices for a retirement plan balance:

• Take it as cash. The whole amount is generally taxable in that year, possibly pushing you into a higher bracket, and may be subject to an early withdrawal tax if you are young enough.
• Roll it over. Moving it to an IRA or another qualified plan keeps it tax-deferred.
• Take regular payments. Some plans offer installments or annuity payments.

Direct rollovers are safest

In a direct rollover, the plan sends the money straight to the new account. If instead the plan pays you first, it is generally required to withhold a portion for federal income tax, and you have a limited window to deposit the full amount, including the portion that was withheld, into a new account to avoid tax. Missing that window turns the payment into a taxable distribution. A trustee-to-trustee transfer avoids the problem altogether.

Company stock in your plan

If your employer plan holds your employer's stock that has appreciated, special rules for net unrealized appreciation may allow favorable tax treatment if you take the shares in a qualifying distribution. This can be valuable, but it requires planning before you roll anything over.

Roth conversions

You may move money from a traditional account to a Roth IRA and pay income tax on the amount converted. Afterward, qualified withdrawals are tax-free. Conversions can make sense in years when your income is low, but the tax is due right away, and you should have cash outside the account to pay it.

Required distributions

If you must take a minimum amount each year, you can usually combine the amounts from multiple IRAs and withdraw from any of them, though employer plans generally require separate calculations. Missing the required amount can result in a penalty, so set up automatic payments if possible.

Withholding and estimated taxes

You can often elect how much tax is withheld from distributions. Withhold enough to avoid underpayment penalties, or make quarterly estimated payments. Look for tax forms from your plan each January that report what you received.

Spouses and beneficiaries

Special choices apply to inherited accounts. A surviving spouse typically has more options than other beneficiaries, and non-spouse beneficiaries are generally required to empty the account within a set time frame. Rules have changed in recent years, so verify them at irs.gov.

Before you move any retirement funds, contact our firm and we will help you choose the method that fits your tax situation.