Things You Should Know
How will I be taxed if I take a 401(k) distribution in cash?
Depending on your age, a distribution will be taxed by the IRS and state of Missouri based on your tax rate. If you are under age 59 1/2, you could be subject to an additional 10% premature distribution penalty. Example, Bob, age 53, has $100,000 in his 401(k) and elects to take all of it in a distribution to pay off his house. The $100,000 puts him in a higher tax bracket for federal (25%) and state (6%). He is also subject to the premature distribution penalty of 10%. Bob’s tax on the $100,000 distribution is $41,000 and he takes home $59,000.
How can I move my money out of my 401(k) without getting taxed?
There are several options for moving money away from your 401(k). While you can roll the money into a new employer 401(k), many opt to rollover their accounts tax-free into an IRA. This choice effectively avoids taxes and gives flexibility for investing your retirement savings.
If I need income from my retirement account to supplement my earnings, can I do it tax efficiently?
This depends on your age at the time you begin distributions. Any distribution will be subject to federal and state income taxes. If you are under age 59 1/2, you could be subject to the additional 10% early withdrawal penalty. This can be avoided by making an election to take equal periodic distributions for a minimum of five years. The amount of the distribution is determined by formula and advanced planning should be employed while considering this election.
How should I invest my retirement savings?
We recommend that you diversify your retirement assets among a variety of investments in a way that optimizes the balance between the amount of risk you want to take and the returns you need to meet your long-term retirement objectives. This process is called asset allocation and is a critical part of your retirement planning.
What are the advantages to rolling my 401(k) over to an Individual Retirement Account (IRA)?
A direct rollover into your own IRA lets you avoid paying current income taxes and preserves the tax-deferred status of your retirement savings. It also can offer a wide range of investment choices that are not limited to your employer’s plan. By using an advisor, you will have an advocate to help you make choices regarding beneficiary designations and investment options.
I am 62 years old. Should I start taking social security benefits now?
The decision on whether to begin receiving your social security benefits varies from person to person. Generally, your benefits will be reduced if your wages exceed $15,120 per years. If your wages are less than that, it is very compelling to being taking the benefits at age 62. This decision, coupled with the consequences, should be considered carefully with your advisor.
I took a lump sum distribution, and now I realize that the tax implications are too severe. Do I have any options to avoid this problem?
Yes. The total amount may be rolled over tax free into an IRA or another retirement plan if completed within 60 days of receipt of the distribution. Keep in mind that when you take a lump sum distribution, your employer is required to withhold 20% federal taxes. So you will only receive 80% of the account balance when the distribution is made to you.