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Now browsing: Hometown News > Columnist Archives > Business - Ronald Wilson

Know how to take your lumps
Rating: 2.93 / 5 (161 votes)  
Posted: 2006 Feb 23 - 21:02
• If you are about to retire or change jobs, or if your employer is terminating the company retirement plan, you may be eligible to receive a "lump sum distribution" as defined in the Internal Revenue Code. Such a distribution may be substantial and may represent the cornerstone of your retirement security, so it is important to consider your options carefully before making a decision regarding distributions.

If you are about to retire or change jobs, or if your employer is
terminating the company retirement plan, you may be eligible to receive a
"lump sum distribution" as defined in the Internal Revenue Code. Such a
distribution may be substantial and may represent the cornerstone of your
retirement security, so it is important to consider your options carefully
before making a decision regarding distributions.
Basically, you are faced with two main options: Should you take a direct
distribution and pay your taxes now? Or should you roll your distribution
over into a traditional individual retirement account?
If you decide not to roll the distribution over into a traditional IRA,
you must pay tax on the distribution in the year you receive it.
You will, of course, be able to invest the remainder as you please.
The main benefit of paying taxes on your distribution now is that you may
be eligible for special tax treatment. If you were born before 1936, you
may be eligible for 10-year tax-averaging on your lump sum distribution.
Or, if your distribution will include shares of your employer's stock, a
portion of your distribution may be eligible for the new lower capital
gains tax treatment.
If either of these situations exists, you may be able to pay a lower tax
rate than usual on your distribution. If not, your distribution may be
taxed at your ordinary income tax rate so you may want to consider your
second option.
Your second option is to roll the distribution over into a traditional
IRA.
This alternative assures that assets will continue to enjoy tax-deferred
growth to provide for your retirement. Under current IRS regulations, you
need not begin taking distributions from your traditional IRA until you
reach age 70 1/2.
Here are some facts to keep in mind when faced with the distribution
decision:
Only 60 days are permitted between the receipt of your lump sum
distribution and the date of the roll over.
All contributions (pre- and after-tax) and earnings distributed from the
employer's qualified plan may be rolled over.
Regardless of whether it is deductible, it is still possible to make an
annual $4,000 (for 2006) IRA contribution, plus a $1,000 catch-up for those
who have attained age 50, to a traditional or Roth IRA account.
Contributions to the IRA may only be made in cash; but, with a rollover
transaction, if non-cash assets are received as part of the distribution,
they may be rolled into the IRA (e.g. employer stock or mutual fund
shares).
Distributions may be made from a traditional IRA account at any time after
age 59 1/2 free of penalty.
The traditional IRA account provides you with an opportunity to continue
building assets during working years through continued tax-deferred
compounding. There will be no tax implications until you begin to take
distributions.
This continued tax-deferred growth could mean the difference between your
living simply or living well during your "golden years."
Of course, before you decide which strategy best meets your objectives, it
is a good idea to consult with your financial and tax advisors.

Ronald Wilson, a certified public accountant and certified financial
planner, is a financial advisor with Raymond James Financial Services.
Contact him at (561) 844-8448 0r e-mail at ron.wilson@raymondjames.com.




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