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Now browsing: Hometown News > Business Columns > Chadwick L. Hargis

Chadwick L. Hargis
This Week | Archive

Explore your retirement plan distribution alternatives
Rating: 2.93 / 5 (177 votes)  
Posted: 2007 Dec 28 - 02:53

Did you know that you may not have to retire to be entitled to receive a distribution from an employer-sponsored retirement plan, such as a 401(k), profit sharing or defined benefit plan?

You may, for example, be entitled to a distribution if you are leaving your company, if your company is terminating its retirement plan or if you are the beneficiary of a deceased plan participant.

Regardless of when and why you become eligible for a distribution from an employer-sponsored retirement plan, what you decide to do next may well be one of the most important financial decisions you will make.

Since your employer-sponsored retirement plan distribution could represent the largest sum of money you'll ever receive at one time, it is important to do your homework and evaluate your options before you receive your distribution. It also makes sense to consult with a financial advisor and tax advisor who can provide recommendations to help you select the most appropriate distribution alternative to fit your individual circumstances.

Although the number of distribution alternatives available to you will vary depending on the terms of your specific plan, there are three common distribution alternatives:

Annuitized payments

Generally, when you elect an annuitized form of payment from an employer-sponsored retirement plan, you will receive a set monthly benefit amount either for your life (or the joint life expectancy of you and your spouse), or for a predetermined number of years.


. Provide a steady payment stream for life intended to guarantee that you (and potentially your spouse, if you are married) will not outlive your retirement savings or provide steady payments for a set amount of time.

. Avoid the mandatory 20 percent federal tax withholding on lump sum distributions (a lower withholding rate will apply) and the 10 percent early distribution penalty tax, if applicable.

. You are only taxed on the payments when you receive them, thus stretching out your tax liability.


. You generally cannot elect to modify the payment terms should your financial circumstances change.

. Depending on the terms of the annuitized payment option, distributions often may cease at your death, meaning that no further benefits under the annuity contract would be paid to your heirs.

. You bear the risk that the purchasing power of your annuitized payments may not keep up with inflation.

Lump sum distribution

Many plans permit the participant or beneficiary to elect to have the entire benefit amount paid in the form of a lump sum distribution. If you elect to take a lump sum distribution, you will generally have to decide between:

. Paying taxes on part or all of the lump sum distribution.

. Rolling over part or all of the distribution to an IRA.


. You have complete access to the funds remaining after taxes.

. You have total investment discretion.

. Under certain circumstances, taking a lump sum distribution may entitle you to special tax treatment. For example, when all or part of your lump sum distribution is comprised of employer securities in a qualified plan, you may be eligible to defer taxes on the portion of your distribution that constitutes "net unrealized appreciation" (NUA) until the stock is sold.


. If you are not eligible for special tax treatment, your lump sum distribution generally will be included with your other taxable income. That means it could be subject to a federal tax rate as high as 35 percent. State income taxes also generally apply, which would make for an even higher immediate tax burden.

. You no longer benefit from the tax-deferred growth of retirement assets.

. You may exhaust all of these assets during your lifetime.

Rolling over distributions to an IRA

The third distribution option available in many plans is to roll over all or part of the amount of the retirement distribution to an individual retirement account (IRA). By rolling over some or all of the distribution to an IRA, you can defer taxes on the amount rolled over and you will have the ability to decide how to invest your money.


. The avoidance of what could be a hefty, immediate tax burden, allowing you to invest more money now.

. The opportunity for faster accumulation of your money over time through tax-deferred growth.

. The ability to invest your retirement assets in almost any way you would like.


. You may exhaust all of these assets during your lifetime.

. For traditional IRAs, you must begin taking annual required minimum distributions (RMDs) after age 70.

Chadwick L. Hargis is a financial advisor at UBS Financial Services, Marina Tower, Melbourne. He can be reached at (321) 729-6770 or chad.hargis@ubs.com.

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