NOTE: The IRS is waiving some RMD requirements due to
COVID-19. Please see IRS.gov for details.
As you prepare for retirement, perhaps your biggest decision is what to do with the money you’ve been working hard to save in your retirement plan (other than a pension plan). While your employer may allow you to stay in the retirement plan after you retire (which has pluses and minuses your financial professional can explain), you will at some point need to access your money. Here are your main choices.
Take a lump sum
You can receive all of your money right away in a lump sum (a single payment, as opposed to several smaller payments), but in most cases, you’ll have to pay federal income taxes on the full amount the year it is received. There may be other state and local tax obligations to consider. Also, a lump sum may be subject to an additional 10% IRS penalty in certain circumstances.1
Rollover to an IRA
You can also defer taxes on your lump-sum distribution by rolling it into a traditional IRA (not a Roth IRA). This may give you more investment options than your employer’s plan, so you can manage it any way you want. Depending on your investment choices, market risk may affect your IRA’s value. And keep in mind that the IRS doesn’t allow you to keep retirement funds in your account indefinitely. At age 72, you must start taking withdrawals called “required minimum distributions” (RMDs), which are based on life expectancy and current age. (If you turned 70½ prior to Jan. 1, 2020, your RMD starting age is 70½.) www.irs.gov
Annuities can help protect and grow your money, and you can convert the value into regular, guaranteed payments that can last as long as you want.
You can also rollover all or part of your retirement distribution to an annuity, which is not a taxable event. Annuities can help protect and grow your money, and you can convert the value into regular, guaranteed payments that can last as long as you want. Some annuities have a built-in annual payment increase to help you keep pace with inflation.
Please note that IRAs are tax-deferred whether or not they’re funded with an annuity. This means an annuity doesn’t provide any additional tax-deferral benefit. However, annuities can offer other features such as death benefits and income payment choices.
Receive regular payments
Retirement plans usually let you receive regular monthly or quarterly payments from your account once you retire. You’ll decide how much you want to receive and how often. The downside is the payments aren’t generally guaranteed to last as long as you live. Keep in mind that because you are taking a withdrawal from a tax-deferred account, you may owe taxes.
What’s right for you?
Your financial professional can help you decide which option will best fit your needs. If you don’t have one, find out how they may be able to help you.