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Tax Implications of Early Retirement Lump Sum Payment???

If anyone can help me with this, I would appreciate it.

I turn 55 this year, and I become eligible on my birthday to get a lump sum retirement payment from my former employer. It will be around $90K. I will take it now because I'm afraid if I wait until I'm 59, they might change the rules, or stop paying altogether, as some other companies have done.

I quit working several years ago with about $300K in my (regular) IRA. With a little luck in the stock market, that's now around $500K, divided among several accounts. No taxes yet, since it's an IRA. I have been living on my savings, supplemented by withdrawals from my IRA. I don't have to pay early withdrawal penalties because I'm taking "substantially equal" annual amounts from a couple of the smaller accounts, according to the minimum withdrawal formula in the IRA pub (basically balance/life expectancy). I haven't had to file a return because my IRA plus my savings interest comes to less than the minimum income needed to file (now about $8K per year). Since I am single, my house is paid off, and I live frugally, I can actually live quite comfortably on about $10K/year.

Since I didn't owe any tax last year, I gather that there will be no penalty for not filing estimated taxes if I take the $90K as income this year. However, I also gather that I will be taxed at the top rate, plus a penalty for taking the payment before age 59-1/2.

So, my questions:

  1. Can I have this payment sent to an existing IRA account and avoid taxes on it altogether?

  1. Is there any way to take the payment as regular income, and income- average over past or future years to lower my tax rate?

  2. If I take this payment as regular income, and pay the 10% penalty for early distribution, will it also trigger penalties in my existing IRAs that I have been withdrawing money from?

  1. I don't know much about Roth IRAs. Would there be a way to get this into one without a big tax bite?

Thanks for any help, and especially for references to specific pages of IRS publications.

Reply to
a2mgoog
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Correct.

Not quite. The gross amount would be added to your other income for the year, and then tax computed as usual. It doesn't all get taxed at your final marginal rate. There would be a $9,000 penalty on top of the income tax.

Yes.

No

No. Remember, though, that you must continue the SEPPs for the required time even though you may not now need the money.

The income tax bite would be the same, but you'd avoid the 10% penalty. There's nothing that requires an all-or-nothing conversion, so you could convert just a portion each year, pehaps enough to bring you to the top of the 10% bracket.

Rollovers and lump-sum distributions are discussed in IRS Publications 575 and 590. Roth IRAs are in 590.

Reply to
Phil Marti

(snipped.... for brevity....) .

I'm only going to answer your #1, since it's the only prudent thing to do, IMHO. (Well, sometimes.) It's a rollover, and while not avoiding taxes altogether, certainly strings them out over your future life.

As I tell my clients, "Tax postponed means tax saved." (There's got to be a better way to say that, something pithy that rhymes.)

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

Roll that money directly to an IRA. The 'zero bracket' in 2008 is $8950, take advantage of it. (Exemption in 08 = $3500, STD deduction for single = $5450). The increases to these numbers may very well stay ahead of your need for cash, which would be great. Worse case, you start to pay

10% on some of the withdrawal. JOE
Reply to
joetaxpayer

Thanks for your response. I think that's what I'll do. I looked through 575 and 590, and it seems clear that a direct rollover to a simple IRA means no taxes (this year) on the distribution. I can't tell, though, whether I am required to file any forms. If everything is between my ex-employer and my IRA trustee, do I need to file anything?

Reply to
a2mgoog

Thanks to everyone for the helpful responses.

Reply to
a2mgoog

Yes. You'll receive a 1099-R from the old plan. See the instructions for line 16 of the 1040 for what you do.

Reply to
Phil Marti

Be sure that when you request the lump-sum payment, tell them it is a rollover and to not withold any federal, state, etc taxes. If they withhold 10k and you roll over the remaming 80k to a traditional IRA, I'm not quite sure what happens.

Reply to
removeps-groups

Thanks again.

Reply to
a2mgoog

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