Monday, February 14, 2000
ASK THE MONEY PANEL
Consumer's job to set aside taxes from lump sum
Question: I received a lump-sum a couple of years ago, and took the option of using the money to pay off some bills and buy a condo. Why didn't the financial company take out the right amount of tax? What is the requirement for financial companies to take out the right amount of tax?
Answer: Rob Bult, a certified financial planner and certified public accountant with Fitzgerald Lame Torbeck Group/JC Bradford & Co., says that this scenario sounds like one where he would have tried to guide you away from taking a lump sum from your retirement plan in the first place.
As your questions imply, it probably turned out to be an expensive tax decision. By taking the lump sum, you gave up a compounding opportunity to defer taxes into the future when your tax rates may be lower. Also, had the money been invested in the stock market, your balance may be significantly larger today. But of course, hindsight is 20/20.
Under your circumstances, he would have suggested you look at rolling the account to another qualified plan. The new qualified plan may have lent you some money from the account and allowed repay ment, generally up to five years. Under this strategy, no taxes would have been due.
Now to answer your first question: The financial company, your retirement plan administrator, did not take out the right amount of tax because of an apparent breakdown in communication. They may not have taken the time to understand your withhold ing needs, and it appears that you may not have understood their withholding options on the distribution form you should have signed.
Ultimately, the responsibility to determine the proper amount of tax withholding on income you receive is yours or the tax adviser's you hire. This is so because you are the only one who knows your total income picture, the amount of deductions that will offset your income and how much tax has already been paid or will be paid through withholdings and estimates.
The answer to your second question assumes that you are talking about a qualified plan lump sum of cash that could have been rolled to another qualified plan or Individual Retirement Account as an eligible rollover distribution. In this case, the financial company would be required to withhold a minimum 20 percent federal withholding tax on the lump sum. Generally, this percentage could be increased based on your withholding need and state tax withholding could also be elected.
— Compiled by Amy Higgins
Readers should consider the advice from the Money Panel as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.
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