 Systematic Withdrawals
Some retirement plans may let you take systematic withdrawals. These may be either a fixed dollar amount on a regular schedule, a specific percentage of the account value on a regular schedule, or the total value of the account in equal distributions over a specified period of time.
The Lifetime Annuity
Your retirement plan may let you take payouts as a lifetime annuity. It converts your account balance into guaranteed monthly payments that base on your life expectancy. If you live longer than expected, the payments continue anyway.
Several advantages of lifetime annuity exist. They are:
- avoiding the temptation to spend a large amount of your assets at once and the pressure to invest a large sum of money that might not last for the rest of your life;
- there is no large initial tax bill on your entire nest egg;
- each monthly payment is taxed incrementally as ordinary income.
It is very good if you may choose a joint and survivor annuity, it is available when you are married. It allows you get a lower monthly retirement payment than the single annuity option. However, your spouse would continue to obtain a part of your retirement income after your death. If you reject an annuity with a survivor option, your monthly payments stop with your death.
Lump-Sum Distribution
Lump-sum distribution means that you will take the money from your employer-sponsored retirement plan as a single lump sum. You will receive the entire vested account balance in one payment, which you can invest and use as you decide.
If you choose a lump sum, you will have to pay ordinary income taxes on the total amount of the distribution in one year. You have to take into consideration that a large distribution could easily move you into a higher tax bracket. Another notion is the 20% withholding rule: employers issuing a check for a lump-sum distribution are required to withhold 20% toward federal income taxes. So, you would get only 80% of your account balance, not 100%.
Before you take any action on retirement plan distributions, it would be reasonable to consult with a tax professional regarding your particular situation. Elect carefully, because your decision and the consequences will stay with you for life.
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