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by Sarah Keilholtz
With employees changing jobs more frequently than ever before, it’s rare to find someone who has worked his or her entire life for the same company. If you’ve recently changed jobs or retired, you should know that you may be facing some complicated tax rules and potentially significant tax consequences.
Many employees, upon changing jobs or retiring, find themselves eligible for a distribution from their employer through a 401(k), qualified pension, profit sharing stock bonus plan, or 457 plan. Deciding on how to make the best use of this money is not an easy task. Just one or two hasty decisions may leave you with a tax bill that could wind up costing you up to 30% of the assets you’ve worked so hard to accumulate.
The IRS requires that a 20% withholding tax be automatically applied to all lump-sum distributions. If you’d like to avoid this withholding, you can arrange in advance to directly rollover any distribution you receive into an IRA through a trustee-to-trustee transfer. You may also rollover part of your distribution into an IRA Rollover Account and use the balance for whatever purpose you wish. Of course, you’ll still be liable for taxes due on the amount distributed directly to you. (Note that if you choose to rollover into a Traditional IRA, you have to begin taking distributions by April 1 of the year after you reach age 70).
Rollovers must be completed Within 60 Days. If you do not directly rollover your distribution, you’ll still have 60 days to weigh your rollover options. After that time, taxes will become due on the distributed amount. Your employer’s plan will withhold 20%, leaving you with 80% of the distribution. You may still rollover the full value of the distribution but must replace the withheld amount from another source. And you can’t wait until you get a tax refund to rollover the amount withheld.
If you decide to establish an IRA Rollover Account, taxes on your distribution will be deferred until you begin making withdrawals. In addition, any account earnings or gains will have the opportunity to grow on a tax-deferred basis. What’s more, most Rollover Accounts offer a variety of investment options from mutual funds to professionally managed portfolios and so are suitable for a wide range of investors.
Funds received from an employer plan distribution will likely represent a significant portion of your liquid financial assets. As a result, they deserve all the time and attention you can afford to give them.
If you would like more information on how to make the best financial use of your distribution, please write 44 North Potomac Street, Suite 102, Hagerstown, Maryland, 21740.
Morgan Stanley is a service mark of Morgan Stanley Dean Witter & Co. Services are offered through Morgan Stanley DW Inc., member SIPC.
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