What are my options when receiving a distribution from my IRA or 401(k)?

In general, when you receive a distribution from a 401(k) or IRA you consider the four following tax options:

You can report the distribution as ordinary income: Anyone who receives a distribution from a 401(k) or IRA can choose to pay ordinary income tax on the distribution.
You can rollover the distribution to a traditional IRA or other retirement plan: rather than paying ordinary income tax on your retirement plan distribution, rolling over into a traditional IRA is a very attractive option. Note: If the funds are distributed directly to you, you have 60 days to deposit them into another plan or an IRA. The portion that is rolled over will continue to be tax deferred and will be subject to all the rules of the new plan or IRA. Any portion that is rolled over within 60 days will be subject to ordinary income tax (note the 60 days start when you have the distribution in hand). In general, anyone who receives a distribution from a qualified plan or qualified annuity is permitted to roll it over.
If you qualify, you can use ten-year averaging. You are eligible to use ten-year averaging if you satisfy all of the following options:
- you were born before 1936
- you have not used ten-year averaging on any distribution since 1986
- you participated in the plan for at least five years.
If you qualify, you can rollover a transfer to a Roth IRA: In general, one is permitted to roll over a qualified plan distribution to another plan, traditional IRA, or Roth IRA. If you choose this option, you are technically converting the assets to a Roth IRA and all of the usual rules to Roth IRA conversions will apply. Firstly, you must be eligible to make the conversion. If you, then you must pay income tax on all the pre-tax money that is transferred in to the Roth IRA and you must pay it in the year of conversion. In 2010, there is one exception. For a conversion that takes place in 2010, you are permitted to spread the income from the conversion over two years (beginning in 2011 - half in 2011 and half in 2012). For conversions after 2010, all of the income from the conversion must be included on the tax return for the year of conversation.

Starting in 2010, everyone qualifies to convert to a Roth IRA. As with any rollover, you will want to arrange a direct rollover from the plan to the Roth IRA to avoid mandatory income tax withholding and to not worry about the 60-day window which the transfer must be completed.

Please contact one of our IRA Experts at 800-472-0646 for more information.