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Retiring

Lump Sum Distribution

Considering 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:

Account Balance $20,000
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

$12,400

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