How to Reduce Taxes on a Retirement Lump Sum Payment
You may spend your entire working life planning and saving for a comfortable retirement, but simply saving your money is not enough. How you handle your lump sum retirement distribution is critical, and making the wrong move could mean losing a good chunk of that money to taxes. Do some careful tax planning in preparation for your long-awaited retirement.
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Instructions
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Check with your employer to make sure your retirement plan qualifies for a rollover into an IRA. When you leave your job, you can roll the money in your 401k or 403b plan into an IRA and save the taxes and penalties that would otherwise apply. If you simply cash the check for your 401k or 403b balance instead of rolling it over, you will trigger a 10 percent tax penalty, as well as ordinary income taxes on the money you withdraw.
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Contact the human resources department at your company and ask about the options for receiving your lump sum payment. Depending on the structure of the retirement plan, you might be able to roll those funds over into a self-directed IRA. If you simply pull the money out of your lump sum retirement plan, you will owe taxes on the amount you withdraw, but rolling the money over into an IRA allows you to avoid those taxes.
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Check with the company that administers your existing IRA plan. Tell them you wish to roll over your lump sum retirement plan to a self-directed IRA. Request a prospectus for the company's index funds. Index funds buy and hold all of the stocks in a given index, such as the Standard and Poors 500, and they only sell stocks when the underlying index changes. As a result, index funds generate very few capital gains, reducing the amount of taxes you have to pay.
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Complete the account transfer form to convert the lump sum retirement plan into a self-directed IRA. Enter your name, address, phone number, Social Security number and the account number for your retirement plan.
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Make copies of all the transfer forms as well as your retirement statement balance. Keep those copies with your tax records. The money you transfer to the self-directed IRA will only be taxed when it is withdrawn, but you will still need to keep the documentation for your records.
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