Should
You Take The Money
and Run?
What to do with the money in your
retirement plan.
If you’re retiring, taking a position with a new
employer or leaving your job for any other reason, you’re faced with a
major financial decision: what to do with the money in your retirement plan.
You probably know the consequences of taking your savings as a lump-sum
distribution and not investing it in another tax-deferred plan. Uncle Sam is
waiting to tax your money, and when he does, your nest egg may not be quite
so plump. Twenty percent of your savings will be withheld immediately to pay
federal income tax, and you’ll have to pay any remaining federal tax, as
well as state and local taxes, when you file your return. Also, if you’re
under age 59½ and still working, you may be subject to a 10 percent
early-withdrawal penalty. Then, whatever is left won’t continue to grow
tax-deferred.
Some investors are choosing to take a lump-sum distribution anyway,
reasoning that paying taxes now rather than later can benefit them in the
long run. That usually isn’t the case, however. To illustrate, consider
the hypothetical scenarios shown above.
First, assume that at age 50 you decide to take your retirement savings of
$100,000 in a lump-sum distribution and invest it in a non-tax-deferred
investment. You pay $10,000 in premature-distribution penalties. Assuming
you are in the 28 percent tax bracket, you also pay another $28,000 in
federal taxes. That leaves you with just $62,000 to invest. Assuming an
investment return of 8 percent compounded monthly, at age 65 you could
expect your investment to produce a monthly after-tax income of $1,030.*
Now, let’s assume that instead of taking a lump-sum distribution you keep
the $100,000 in your existing plan, roll it into a rollover IRA or roll it
into your new employer’s retirement plan. If that money grows tax-deferred
for 15 years, at age 65, your monthly after-tax income (if you’re in the
28 percent tax bracket) will amount to $2,000-almost twice as much as if you
had taken a lump-sum distribution and paid taxes at age 50.*
These examples show the hypothetical growth of an investment and are for
illustrative purposes only. They do not represent the performance of any
fund, and are not intended as an investment recommendation. Please consult
your financial representative for help in determining which course of action
is best for you when you leave your job for any reason.
*The monthly income stream will continue for 20 years.
