Lump Sum IRA 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 (IRA)?

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 ten-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 $3,000 (for 2004) IRA contribution, plus a $500 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.