How are taxes assessed when a participant retires or takes distributions after leaving the business?
There are three principle ways a plan may allow a participant to receive distributions; each one has different tax ramifications. *IRA ROLLOVER: Within 60 days of a distribution, the monies can be rolled over into an IRA and no taxes will be assessed until the funds are withdrawn from IRA. *Distributions which are eligible for this rollover treatment will be subject to 20% mandatory tax withholding unless they are transferred directly into an IRA or another qualified plan. *PERIODIC PAYMENTS: The monies can be paid out either as an annuity or as installments over specific time period. The payments are considered ordinary earned income are taxed at the appropriate income tax rate. *LUMP-SUM PAYMENTS: A participant who receives, as taxable income, 100% of his plan benefits in one taxable year and meets other requirements may be entitled to special income tax averaging in order to reduce his income tax obligation. Other favorable tax alternatives may also be available.
