Retirement Plan Distributions
One of the most important financial decisions you
may have to make as a retiree is how to receive you retirement
plan benefits. Most retirement plan distributions are taxable
to you in the year you receive them. But you do have a couple
of options available to soften or postpone the tax blow.
- If you receive a qualifying lump-sum distribution
from your employers plan, you may be eligible to use a special
forward averaging method to lower the taxes on the distribution.
Forward averaging is a once-in-a-lifetime opportunity, so plan
to use it to your best advantage. And be aware that favorable
five-year averaging will no longer be available for tax years
beginning after 1999. Ten-year averaging and capital gains treatment
will remain available to qualifying individuals born before 1/1/1936
- You can continue to postpone paying taxes on
most non-annuity distributions from qualified retirement plans
by rolling them over to an IRA within 60 days.
IRA's - if you decide
a rollover is best for you, make plans to have your distribution
transferred directly from your current plan to the IRA. The tax
law requires plans to withhold 20% of all eligible rollover payouts
for federal income tax unless the plan transfers the funds directly
to an IRA or other qualified plan.
Once the money is deposited in an IRA, either through
regular savings or a rollover from an employer's plan, you can
leave it there to grow tax deferred until April 1 of the year
following the year you turn age 70 1/2.
- You have some control when it comes to taking
money out of your IRA. By naming your younger spouse as beneficiary,
you reduce the amount of each payout - and your tax liability.
You could achieve the same result by naming a younger beneficiary
that is not your spouse.
Distributions from other plans
- the rule governing when you must begin receiving distributions
form your employer's qualified retirement plan has changed. Starting
in 1997, required distributions generally must begin by April
1 of the calendar year following the later of (1) the year you
turn age 70 1/2 or (2) the year you retire. So, if you turned
age 70 1/2 in 1996 but are still employed, you do not have to
begin receiving benefits this year, as you would have under the
old rule.
Excess Distributions.
Retirees get another break this year, as well as in 1998 and
1999. The 15% excise tax on excess distributions from qualified
retirement plans, tax-sheltered annuities, and IRAs is suspended
for these three years. This tax generally may be levied if aggregate
distributions from such retirement plans during any calendar year
exceed specified levels ($155K in 1996, or $775K in the case of
certain lump-sum distributions, subject to inflation adjustments.
If you plan to withdraw a large sum for your plan, now may be the time to do so.
Your Social Security Benefits
Social Security benefits can be subject to taxation. The amount
of your Social Security benefits that will be taxed depends on
your "provisional income." Provisional income is your
modified AGI plus one half of your Social Security benefits, modified
AGI included tax-exempt income.
The chart shown below will show the amount of $10,000 in Social
Security benefits that will be included in income for both the
single and married taxpayer.
