Take a Lump Sum Distribution Although it may be tempting, taking cash from your retirement plan is rarely a good idea. In fact, you may lose nearly half of your hard-earned investments to taxes and penalties!
Watch Out for Uncle SamIf you aren't careful, the IRS could be the biggest beneficiary of your retirement plan investments. Taking a lump sum distribution triggers the mandatory 20% withholding for federal taxes, which means your savings go directly to Uncle Sam. On top of that, a lump sum distribution could bump you into a higher tax bracket that would slap you with even higher state and federal taxes at year-end.1 If you are younger than age 59½, your distribution may also be subject to a 10% early withdrawal penalty.
Taking Cash Can Be CostlyHere's what's left of a $20,000 cash payout:*
Stretch Your Investments InsteadRolling your retirement plan assets into an IRA allows the bulk of your investments to continue growing tax-deferred.
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
Disadvantages of a Lump Sum Distribution