Cents and Sensibility
Cents and Sensibility
Are you retiring soon? Changing jobs? Leaving your company? If so, you're probably faced with a big decision: What should you do with the money in your current employer's retirement plan? Understand IRA options
In general, you have two options when you receive a distribution from your employer's retirement plan: (1) Take the money; or (2) Roll the money into another retirement account.
You can elect to have your retirement plan distribution sent to you. If you do, 20 percent will be sent to the IRS up front and will be applied to your taxes when you file your return. So, if you are in the 28 percent tax bracket, you will owe an additional 8 percent at tax time. On top of that, if you are under age 59 1/2, you may be subject to a 10 percent early withdrawal penalty. An exception to this penalty applies if you are age 55 or older in the year you separate from service.
>> Example:
Mary is 52 and retires from ABC Co. She is in the 28 percent tax bracket. Mary decides to have her 401(k) balance of $150,000 sent to her. She will be subject to income tax, 20 percent withholding and the 10 percent early withdrawal penalty.
401(k) balance -- $150,000
20 percent withholding -- $30,000
Remaining taxes (28% tax bracket) -- $12,000
10 percent early withdrawal penalty -- $15,000
Amount left to invest -- $93,000
You can avoid paying taxes on your retirement plan distribution if you roll the money into an Individual Retirement Account. You will not be subject to taxes until you need to start withdrawing money from your IRA. If you don't need to take income from the IRA right away, the money will continue to grow tax-deferred.
If you need money prior to age 59 1/2, you can take systematic withdrawals from your IRA without the early withdrawal penalty. You must, however, take withdrawals of the same amount every year for five years or until you are age 59 1/2, whichever is longer.
Retirement is an exciting time in your life. Don't spoil it by making an uninformed decision.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com