Lump Sum Distribution
taking a lump sum distribution from your retirement savings plan? You might want
to re-consider. In most cases, lump sum distributions can end up costing you more
than any other option. Here’s why:
When you withdraw your savings in a lump sum distribution:
- The entire amount is subject to a mandatory 20% federal tax withholding.
- The amount is also subject to any applicable state and local taxes.
- You’re subject to a 10% IRS early withdrawal penalty, if you’re
under age 591/2.
- You lose the tax-deferred status of your retirement savings.
As a result, you may only end up with about 60% to 70% of the money you worked
so hard to save!
Let’s say you accumulated $20,000 in your retirement savings plan. If
you were in a 28% tax bracket and under age 591/2 when you took your distribution,
here’s what would happen to your money if you took a lump-sum distribution:
| 20% immediate tax withholding
|| $ 4,000
| 8% additional taxes
due at filing
|| $ 1,600
| 10% early withdrawal penalty
|| $ 2,000
| IRS share
|| $ 7,600
| Your Share