Get advice about lump-sum retirement payouts

July 19, 1992|By Knight-Ridder News Service

LONG BEACH, Calif. -- At the end of last year, after putting in 40 years at Douglas Aircraft Co., Don H. Scoville retired.

At 58, he left his job as an administrator in the company's C-17 program, taking with him the largest check of his life: more than $100,000 from a 401(k) tax-deferred savings plan.

With the big payout, Mr. Scoville faced the investment decision of a lifetime. In today's economic hard times, with layoffs all too common and older workers often encouraged to retire early, it is a situation confronting many people.

What should you do with a large lump sum from a pension, 401 (k), profit-sharing, stock bonus or other tax-deferred retirement plan?

How can you minimize your taxes?

And how should you invest your money to secure your retirement?

One of the first things that Mr. Scoville did was turn to John M. Valenzuela, a certified financial planner with Prudential Securities Inc., for advice.

Given the stakes, you, too, might begin by getting professional advice from a financial planner, certified public accountant or investment broker. These professionals say these are questions to consider:

The first is usually: "How old are you?"

The critical age is 59 1/2 .

At that age you can make penalty-free withdrawals from tax-deferred retirement plans.

Some companies allow you to keep your money in their retirement plans after you leave the company. But if you can't keep it in or you prefer to manage your own money (and many people do), what should you do with your payout?

If you are 59 and under, you have only 60 days to roll over your payout penalty-free into another tax-deferred retirement plan such as an individual retirement account (IRA).

That's what Mr. Scoville did; he put his money into an IRA.

Lump sum payouts are regarded by the Internal Revenue Service as an early withdrawal from retirement plans. If you don't put your money into another tax-deferred retirement plan, you'll face a 10 percent early withdrawal penalty.

That's not all. With federal and state income taxes of nearly 40 percent combined, a very large chunk of your money could be going to taxes.

"Usually, the biggest mistake is to not roll over within the 60-day time frame," says Max Dezemplen, a certified financial planner with Financial Counseling Resources in Long Beach. "Nearly 10 times out of 10, people should roll over their money" into an IRA.

By stashing your money in an individual retirement account, you avoid the early withdrawal penalty and you defer your taxes until you withdraw money from the IRA.

Whatever you do, you'll pay income taxes. The only question is: now or later?

You may want to keep your money and pay your taxes now -- if your lump sum payout is small, or if you need the money now, or if you're betting that tax rates will climb.

"We now have the lowest tax rates in years," says David J. Peters, a chartered financial planner in Los Alamitos, Calif. "A lot of people think tax rates are going to go up in the next couple of years."

Even so, there is a school of thought that favors delaying tax payments to a time when you'll have less income.

"Any time you can defer income taxes, you're better off," says certified financial planner Phillip Cook of Financial Network Investment Corp. in Torrance, Calif.

Eventually you'll pay tax on it, but by then you'll have retired, your income is likely to be lower and so will your tax rate.

If you're putting your money into an IRA then, what kind should you invest it in?

Mr. Cook says he favors mortgage- or government-backed securities and insurance annuities, but only from the strongest insurance companies.

Mr. Peters says he, too, recommends insurance annuities and a mutual fund invested in government bonds, such as DTC Oppenheimer Strategic Income.

Mr. Valenzuela suggests government bonds, high-grade utility securities and blue-chip stocks.

Don't get greedy, they warn. Don't put your money in high-risk investments. They recommend a varied, low-risk portfolio.

"I think most people are unrealistic," says Mr. Cook. "Most people would like to think that investing in Wall Street will make them rich.

"I think the most a financial adviser can do is to keep you from being poor -- so you'll have the money to do what you want to do when you retire."

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