By Diana Palmieri
The joys of tax season! Hopefully, there’s a refund check is in your future. I recently sat down with my tax preparer, and he told me a story that knocked my socks off. I would never derive pleasure from another man’s pain, but I stopped belly aching about what I owed when I head this story.
One of his clients retired several years ago. He kept his retirement plan, which had a considerable amount of funds in it, with the company for some years. Last year he received a letter that the plan was making some changes and he had to make some choices. This particular client is under the age of 59½, so some careful thought should have gone into this choice. He could take a lump sum distribution payable to himself, lump sum distribution rolled over to an IRA, or annuitize the retirement plan. What would YOU do? If you answered, “Call my tax guy or financial advisor,” hooray for you! If you answered annuitize, not a bad choice. This would stretch out this retirement-plan-that-has-become-an-annuity for either a certain period of time or for the rest of your life. There are usually provisions for some survivor benefits. If you chose the lump sum distribution option and rolled it over to an IRA, you’d be pretty smart. You would invest the money, hopefully get some decent returns, and supplement your retirement income for the rest of your life. You can also leave this money to your beneficiary should something happen to you. The lump sum option payable to yourself is not the best choice. A considerable amount of money like this will require a large chunk to be paid in taxes, and then there’s the possible penalties if you are under age 59½.
Let me tell you what he did. He consulted no one. He ended up checking off the lump sum distribution option payable to himself and chose not to hold back any taxes. What this meant to him (approximate figures):
Lump Sum Payout $ 600,000
Under 59 ½ penalty @ 10% $ 6,000
Federal Taxes owed $ 168,000
State Taxes owed$ 30,000
What’s left ——–$ 396,000
Holy _____(you fill in the blank)! That’s $204,000 in taxes owed. With some write-offs and deductions, the tax bill was lowered somewhere south of $190,000. After he broke this ghastly news to his clients, the air in the room suddenly became so thick it could be cut with a knife. This is all they have left to retire with–and there isn’t a thing that can be done. This old cliché saying is so true: The only guarantees in life are death and taxes. So these taxes will be paid, and death will most likely occur from his wife’s hands. My tax preparer quietly took his leave.
Folks, please: If you ever receive any type of payout offering on a retirement plan, it is imperative you call either your tax preparer or your financial advisor. Call the plan and ask them too–although they will likely not advise as to what’s the best choice, they will at least tell you to call your tax preparer. Don’t try to do this on your own. One simple phone call could have saved so much money and pain.
The information contained in this article is not intended to constitute legal, accounting, tax, investment, consulting or other professional advice or services. For specific information that applies to your circumstances you should consult a qualified tax advisor. In accordance with IRS Circular 230 Disclosure, and to ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this article was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
Diana Palmieriis dually registered with Vanderbilt Securities LLC and H Beck Inc., which are unaffiliated. Securities offered through Vanderbilt Securities LLC, member SIPC/FINRA/MSRB.
