Taxation of lump sum retirement plan from employer
66 year old retiring from employer with a $1,117,000 lump sum of his companies retirement plan and will deposit these funds with his investment adviser.
1. Any initial tax?
2. How will those funds be taxed, at withdraw?
3. Will those funds have a required distribution?
4. How are these fund labeled, ie like others, 401(k), IRA, etc?
Permalink Submitted by Alan - IRA critic on Mon, 2016-02-08 23:42
A direct rollover check made out to an IRA custodian FBO the taxpayer’s IRA is the usual action to take when lump sum funds are removed from a qualified employer plan. A direct rollover avoids taxes and withholding on the distribution. An IRA will require RMDs to start at age 70.5 and these will be taxable at the taxpayer’s marginal rate each year. Any check made out other than to another plan will incur heavy taxes if not rolled over within 60 days and also will incur 20% mandatory federal withholding. Better check exactly what the advisor expects to do with a distribution check.
Permalink Submitted by Nathan Kastner on Mon, 2016-02-08 23:52
Whoa…! Way too many questions, and not nearly enough details. You guys might want to slow down a bit and figure this all out before someone “rings a bell that can’t be unrung”.In general, monies withdrawn from a retirement plan are taxable, unless there is an existing basis and/or the money is being rolled to a qualified retirement plan (like an IRA). But, the account has to actually be setup like as an IRA. If he sticks the money in his checking account, and leaves it there, or his “investment adviser” puts it into a non-qualified brokerage account, you are looking at hundreds of thousands in taxes! That would be bad!There should not be an RMD until the client reaches his required beginning date, which will be the year following the year he turns 70 1/2. Of course, if this distribution doesn’t find its way into an IRA, there won’t be any required distribution anyway!!!Quite honestly, if the “investment adviser” isn’t or wasn’t equipped to not only answer all of these questions, but also arrange the safe and tax efficient transfer of this money, maybe it’s time to find another investment guy. As someone that opens IRAs and handles rollovers on a daily basis, you shouldn’t have needed to come to us. But, I’m glad you did, and kudos to you!