Know the implications of lump-sum distributions

Often retirees want to withdraw all their retirement plan savings in a lump sum so that these funds are readily available. Although this might seem convenient, it could cause more problems in the end.

First, the government automatically withholds 20% of all lump-sum distributions for future payment of taxes. The government does allow you to calculate taxes on a lump-sum distribution as if you had withdrawn it in equal installments over the course of 10 years, but you still must pay all income taxes on your distribution in the same tax year that you receive it. In essence, a large chunk of your distribution will be gone in the first year.

In addition, you may still need to invest your money in a vehicle to help you keep pace with inflation, and most savings and money market accounts may not be adequate. Keep in mind that these vehicles will not have the tax-deferred status of your retirement plan account.