Retirement Plan DistributionsIntroduction to Retirement Plan DistributionsWhen you retire, you will begin receiving the funds you have saved and invested over many years. You have options on how and when you will receive them.
Retirement planning is generally viewed as a three-step process. Phase 1 is the projection phase where you determine how much to save for retirement. Phase 2 is the accumulation phase where you save and invest for retirement. Depending on how much you’ve saved for retirement, you may still be in phase 2. Some people must still save even in retirement, so that retirement planning is an ongoing process. Phase 3 is the distribution phase which is comprised of two interrelated parts:
- Selecting a distribution option and,
- Taxation of distribution options.
Now that you’re retiring, you probably thought the decision making process was over and that you could just put your feet up. This is not the case! You now have to decide how you would like to withdraw money from your retirement plan(s). Some retirement plans have only one option; you simply receive a monthly annuity payment for as long as you live, and if you are married, for as long as your spouse lives, if he or she survives you. Other plans have a number of annuity options to choose from, as well as a lump-sum distribution option.
Which option is best for you depends on a number of factors, including your family situation and your ability to manage large sums of money. In many cases, the tax treatment of the retirement distribution does not have to be a controlling factor because lump-sum distributions can be rolled over to an IRA without tax consequences. But the tax consequences should be considered, and you must consider penalty taxes when making your distribution choice.
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