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Taxes on lump sum distribution from mom?

Dear Dave,

My mother passed away about eight months ago. I got a distribution from her 401(k) and an IRA worth about $53,000 because I was named as the beneficiary. I took it as a lump sum distribution, and of course I am going to have to pay taxes on that. The lawyer who did the will told me that it may be possible to spread that income over five years. That would help me with the taxes. Is that true and how do I go about figuring that out?

Bob

Louisville, Ky.

Dear Bob,

This is a possibility if you meet some specific requirements. There is an election that is called ‘Form 4972′. It is an election of distributions from certain retirement plans. There are about a dozen questions that you have to answer ‘yes’ to on the form to make sure you are eligible to use the benefit. Go to your lawyer and pick up Form 4972. As always, read the form very carefully and make sure you cross all of your t’s and dot all of your i’s with this form to avoid any complications. You can go to the IRS’ website to get all of the information you need.

Dave


Retirement 101

Dear Dave,

I am closing in on retirement age and I think I am making it more difficult than it should be. I have IRAs, Roth IRAs and 401(k)s. On some I will pay taxes, on others I will not. I know it is probably much easier than I am making it, so can you give me the simplified version of how to save for my upcoming retirement?

Vivian

Charleston, S. C.

Dear Vivian,

Saving for retirement can become confusing, so don’t feel bad. You are not the first person to be overwhelmed by all of the options that are available. Many people ask me where they should start when it comes to their retirement, and let me tell you that it is not rocket science, and if you know what you are doing, it can be very beneficial for you in the long run. Let’s walk through it for a second:

The Roth IRA grows completely tax-free. So if you save up four million dollars in a Roth IRA over your lifetime, it is all yours. If you save the same amount in a 401(k), about a million of that is going to go out in taxes. So that word ‘Roth’ is about a million-dollar word for those people who start saving early and aggressively for their retirement.

Given the comparison between the two over a long period of time, I am always going to go with the Roth IRA as my first choice to save for retirement. Every time. And now you can put $3,000 per person or $6,000 per married couple in a Roth IRA. That is $500 a month, but it will amount to a very large amount of money for you at retirement. Let me give you an example. A 30-year-old couple that fully funds a Roth IRA from age 30 to age 70 at $500 a month will have $5.8 million at retirement. Now that is a pretty good deal. You could probably get by on that. Hey, if I am half wrong on that you are still on easy street. So the Roth IRA is definitely the way to go because it grows tax-free. And if you are thinking that $500 a month is a lot of money, you’re right, but if you are out of debt, you can come up with $500 a month. Getting out of debt is key to retiring with wealth.

The one exception to this is if your company matches your 401(k). If it is set up to where when you put in $100 your company also puts in $100, then that should be your first step. That is giving you a 100 percent rate of return on your investment. That is hard to beat. The rule of thumb is to always take the match. If there is no match, then go straight to the Roth. If you will save about 15 percent of your income starting at age 30, then you will retire with dignity. If you are over thirty, don’t lose heart and start saving for your retirement now.

Dave


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