Reaching the golden years of your life is a fantastic accomplishment. You’ll likely get to enjoy all the fruits of your labor and use it to your discretion in retirement. When it comes to handling the money accumulated in your employer-sponsored retirement plan, you are faced with a few different options. Our team of CERTIFIED FINANCIAL PLANNERTM professionals handle retirement wealth management for many clients and will help break down your options so you can decide which is best for you. Should you take the payout as a lifetime annuity or a lump sum? Each option has its own set of pros and cons, so it’s important to understand what each option entails before making a decision.
Lump Sum Distribution
If you decide to receive the money from your employer-sponsored retirement plan as a lump sum payout, you would receive the entire vested account balance in one payment. In this case, you can invest this cash or use it however you wish. There can be surprise expenses in retirement, so taking the lump sum payment and reinvesting the proceeds may offer you the most flexibility.
The primary downside to taking a lump sum payout is that if done incorrectly, you may have to pay income taxes on the total amount of the distribution in one year. This could easily push you into a higher tax bracket, which means you would have to pay more in taxes. Additionally, employers are required to withhold 20% of the distribution for federal income taxes. So, if you are expecting to receive $100,000 from your account balance, you would only receive $80,000 after taxes are withheld.
To mitigate some of these tax implications, your retirement wealth management team may suggest a lump sum rollover. In this case, your wealth management group can roll the balance into another qualified retirement plan to defer taxes on that capital. An IRA rollover may give you more options in how you are able to invest and access your money over time.
Overall, a retirement wealth management team may tell you this can be a risky move. You could lose money if the market takes a downturn shortly after you retire and invest the lump sum. However, it can also be a great way to get your money reinvested and start generating dividends and returns as soon as possible. We recommend working with a wealth advisor that understands the strategy of lump sum investing to hedge against a downturn.
The other option for receiving a payout from your employer-sponsored retirement plan is to take it as an annuity. With this option, you would not receive the entire account balance in one lump sum. Instead, the money would be paid out gradually over time, usually monthly. The advantage of this is that you would not have to pay income taxes on the money all at once. You would only be taxed on the money as you receive it.
Another advantage of taking an annuity payout is that it can provide a steady stream of income, which can be helpful in retirement. This option can also help you avoid the temptation to spend a large sum of money all at once.
The main downside to an annuity payout is that you would not have access to the entire account balance right away. If you need the money for an emergency expense, you would have to wait until you receive your next monthly payment. Additionally, if you die before the entire account balance is paid out, your beneficiaries would not receive the remaining funds.
Another thing to consider is that once you elect an annuity payout, you generally cannot change your mind and switch to a lump sum distribution. So, it’s important to weigh all your options and decide what you’re comfortable with.
Retirement Wealth Management Tip: If you are considering retirement options and are legally married, you may be able to utilize a joint and survivor annuity. This wealth management strategy would result in a lower monthly retirement payment than the single annuity option, but your spouse would continue to receive a portion of your retirement income after your death.
Retirement Wealth Management
Making the decision on how to take your retirement plan distribution is a big one. Be sure to consult with a financial advisor to see what makes the most sense for you and your unique circumstances. Retirement wealth management is one of our specialties here at Morgan Rosel Wealth Management. Our wealth management team is here to help guide you through the ins and outs of retirement so you can confidently enjoy the golden years. Give us a call today to set up a consultation.
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