Attention Retirees-to-Be - December 31 Is Your Last Day to…

Chalk this one up under best of intentions delayed: Last time I mentioned I would review some retirement savings options for the self employed in this week's piece. Since then, I've become aware that an important deadline is looming for some of you, which should be mentioned now before holiday madness kicks in.

The article on retirement savings for the self employed will be slated for next time. Meanwhile, if you're planning to take a lump-sum distribution from a qualified retirement plan [such as a 401(k)] in the next several months, this one's for you.

Five-Year Forward Averaging Expires 12/31

A retirement plan distribution option called five-year forward averaging will expire on December 31, 1999 - taking with it an important tax break for those who qualify. Five-year averaging allows some of you to treat a lump-sum cash-out of your entire qualified plan account as if it was taken over five years, rather than altogether. Though you still would need to pay income taxes for the year of the withdrawal, five-year averaging can reduce the entire tax bill by thousands of dollars on a six-figure account.

This is a rather complex strategy, so you may want to call your tax or financial advisor for more on exactly how the math works.

Who Qualifies?

To qualify for five-year averaging in the first place, you need to:

· Be at least age 59 ½
· Not have used this method previously, UNLESS it was before 1987
· Withdraw the WHOLE account
· Use this method on any other plan's lump-sum payment received during the year
· Have participated in your plan for five years or more, or inherited the distribution from a deceased plan participant

Who Should Use It?

Five-year averaging can be a terrific way to reduce taxes on a lump sum you planned to take anyway. But if you didn't plan to take a lump sum out over the next 12 months, why do it now just to grab a tax break? Anything you withdraw now can miss out on potential growth later on, so don't make this move simply to save taxes.

If this sounds like something you should do, look into it now - some plans take awhile to get paperwork moving on distributions, so get the motions going before the year is up.

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