What can I do with this lump sum to avoid it being overly taxed? Can I spend it if I need to? This is not my 401K rather a pension plan that I plan on taking as a lump sum, not waiting until I retire. I am 40 yrs old and will invest the money elsewhere. Any help would be appreciated.
2007-01-10 02:49:59 · 9 answers · asked by Rote 2 in Business & Finance ➔ Personal Finance
You can spend it if you need to, but there will be 20% withheld for taxes (depending on your personal tax rate this may be not enough and you'll owe more, may be too much and you'll get a refund, or just right). Additionally, you'll get hit with a 10% excise tax (not a penalty, just a tax) that you will have to pay next April. So, unless you really, really, REALLY need that money? I would roll it over. (personally, I like the idea of a pension but I recognize that the plan will likely be terminated eventually...your benefit is effectively frozen so no point in keeping it there).
You can roll it over into an IRA, SEP, 401k, 403(b), or perhaps into your new employers pension if they have one. No matter where it goes, if you're going to invest it...roll it over. On the distribution paperwork that will be an option. Do not take it in cash thinking that you'll figure out where to roll it over later. They will take 20% and you'll have to make that up out of pocket or you'll get slapped with an excise tax on that! And you only have 60 days after you get the check....better to get the "where to put it" situated before you request the distribution.
2007-01-10 04:03:20 · answer #1 · answered by digdowndeepnseattle 6 · 2⤊ 0⤋
Yes. It is possible to avoid paying taxes on that lump sum. You have to roll it over. This means that lump sum will not come into your hands - it goes straight into an IRA (Individual Retirement Account), which in your case would be tax-deferred.
However, if you spend it, you will pay a penalty and pay taxes on the amount you take out of the IRA (since you're not retirement age yet).
You should talk to a financial advisor about your retirement money.
2007-01-10 05:36:46 · answer #2 · answered by Think Richly™ 5 · 0⤊ 0⤋
You will be taxed on it, no doubt.
You can open a brokerage account somewhere. You can start with money market or some sort of cash account until you find what you really want to invest it in.
Index funds are good to be in. A bond fund might be of value too.
You can hire someone to be your financial advisor or you could do the research yourself. Morningstar, Vanguard and Fidelity, to name a few, have good sights with good information.
The only way to not be overly taxed is to roll it into an individual IRA. You could put some into a ROTH IRA after you get your lump sum and defer some of the taxes that way when you take it out of the ROTH.
2007-01-10 03:58:56 · answer #3 · answered by parsonsel 6 · 0⤊ 0⤋
Check the vesting plan of the retirement, most vested retirement packages allow for rollovers into an IRA, 401k, 403B, and Roth. Check the fine print of the lump sum.
If you roll it into any of these find a fund family that has good performance over time and let it sit there until you hit 59-1/2 at least.
2007-01-10 02:58:40 · answer #4 · answered by Anonymous · 1⤊ 0⤋
To avoid excessive fees and taxes, it is important to roll your ENTIRE amount into an IRA. If you transfer less than the whole amount then you will be taxed on everything.
Look into mutual funds with a long-term track record of consistent earnings. Also, make sure that over long periods of time the funds beat their competitors (10+ years). One year is not very important because some funds take excessive risks to get a good year and then they will get crushed the next year. Consistency is key!
2007-01-10 03:45:38 · answer #5 · answered by MR MONEY 3 · 1⤊ 0⤋
Go see an investment counselor immediately. There may be a way to roll over this pension money into an IRA and thereby avoiding paying taxes on it.
2007-01-10 02:58:23 · answer #6 · answered by Robert A 2 · 1⤊ 0⤋
You should really go to your bank and ask them details o n what would be best, There are so many differences between one or the other, Depending on what your likings are, When my husband retired from the military we put his lump some into r s ps.
2007-01-10 02:58:54 · answer #7 · answered by ♥ Becky ♥ 6 · 0⤊ 1⤋
Why don't you look into Money Market options for the short term (6mos - 1yr) and take a little more time to research your other opportunities.
2007-01-10 03:01:29 · answer #8 · answered by fdm215 7 · 1⤊ 2⤋
there is really nothing you can do because once you recieve the money it will be considered income and then will be taxed accordingly.
2007-01-10 02:54:29 · answer #9 · answered by links305 5 · 0⤊ 2⤋