My husband invested money in a company tax-deferred plan a long time ago in order to enhance his retirement savings. Recently, his company was bought out by a large firm. He received a call the other day saying that he was going to receive a check for the amount that he had put aside. I do not understand the tax ramifications of this. It will be viewed as income. Is there another option other than taking the cash as income?
“Yes,” said FPA member Robert Loweth, CFP®, of Rexroad Loweth Wealth Management. “The company has the option to force out your husband’s distribution. If the check is payable to him, he has the option to roll it over within 60 days to an Individual Retirement Account (IRA). If he does, there will be no taxes due.”
For his part, FPA member Gary Gross, an associate general agent with Capitas Financial, LLC noted that there are several types of tax-deferred plans; the most common is a defined contribution plan [or 401(k)]. He might also have had a deferred compensation plan — a split funded plan.
So, if the plan is being terminated and the contributions were put in before taxes, you should be able to roll it over to an IRA. “Otherwise you will have to pay ordinary income taxes on the amount received, plus 10 percent if your husband is under 59½,” said Gross. “If the investments were after-tax, then only the amount of the gain would be taxed,” he said, noting the good news is it most likely will be reported as capital gains. “If this is the case, hope the funds come this year as capital gain rates are set to go up next year to 20 percent plus state capital gain rates. Again without knowing exactly what kind of plan it is, it is hard to give a clear answer to the question.”
Your husband’s human resource department should be able to tell him the kind of plan and if the contributions were pre- or post-tax. In addition, Gross suggested that you consult with a local Certified Public Accountant (CPA).