Take a Lump Sum Distribution

Watch Out for Uncle Sam

Taking Cash Can Be Costly

• 10% early withdrawal penalty may be assessed if you are under age 59½.
• You'll owe federal, state and local taxes on the entire distribution at year-end, since it will be considered part of your ordinary income. At the time of your disbursement, your employer must withhold 20% toward your federal tax obligation.
• As you can see, 43% of the payout has been eroded by penalties and taxes.

Stretch Your Investments Instead

If you've already received a cash distribution from your plan, it may not be too late! You have 60 days to move the money into an IRA or a new qualified employer retirement plan. To avoid all taxes and penalties you will need to make up for the 20% mandatory withholding with out-of-pocket money. You can recover this money when you file your federal tax return. (You may only take advantage of this feature once per IRA per 365 days.)

Advantages of a Lump Sum Distribution

• Immediate, unrestricted use of your money.

Disadvantages of a Lump Sum Distribution

• Savings lose tax-deferred status.
• Distribution is reduced by 20% mandatory withholding.²
• Distribution may be subject to a 10% early withdrawal penalty as well as additional federal, state, and local taxes.
• Lose the flexibility to move into a qualified plan or IRA (after 60 days).

¹ Distributions are taxed at applicable federal and state tax rates at the time of the distribution.
² You can make up the 20% that was withheld by your employer for federal taxes out of other savings and roll the entire amount into an IRA if you do it within 60 days of receiving your distribution. Then you can file to recover the original amount withheld by your employer when you file your federal income tax return.

Any tax or legal information provided is a summary of our current understanding and interpretation of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their specific situation.

Here's how a $20,000 cash payout would be broken down. The 10% early withdrawal penalty equals $20,000. $5,600 would go towards federal income tax (assuming a 28% tax bracket). $1,000 would go to state and local income tax. Your savings are reduced to $11,400 after taxes and penalties.

Back to chart.

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