Taxes on Retirement Income
If you decide to move your retirement plan assets into an IRA yourself, your employer is required to withhold 20% of the total you want to move and send that amount to the IRS, as it does with taxes withheld from your salary. You will receive the amount that's withheld after you file your next tax return, provided you have deposited the entire value of your withdrawal including the 20% that was withheld into the IRA within 60 days.The advantage of this method is that you have the use of your money for the 60 days between taking it out of your retirement account and the deadline for depositing it in your IRA. But a serious pitfall is that the amount that's withheld — the 20% — is considered a taxable distribution if you don't deposit the full amount within the required period. Let's say you have $100,000 in a company plan and do an indirect transfer. The company must withhold $20,000 and gives you $80,000. You must still deposit $100,000 in the IRA within 60 days to avoid taxes and penalties. That means you'll have to come up with $20,000 from other sources, such as a savings or investment account. If you deposit only the $80,000, you'll owe income taxes on the $20,000 that was withheld. If you are younger than 59½, you may also owe a 10% early withdrawal tax penalty of $2,000. And once you miss the deposit deadline, the tax-deferred status of the money you don't deposit is gone forever.