IRAs and Other Retirement Payout Choices

15 May 2023

There’s no universal right answer about how to take your retirement plan payout, but when you have to make a decision, it helps to know the advantages — and the disadvantages — of your choices.


What the issues are

The level of comfort you have with making investment decisions is a major consideration in deciding among the various payout alternatives. If you’ve been investing successfully for years, the prospect of building a portfolio you control with a lump sum payout or an IRA rollover can be appealing — and realistic. Your challenge will be producing enough income during retirement.

But if you don’t want to worry about outliving your assets, you may opt for the relative security of an annuity. Knowing that the same amount is coming in on a regular basis makes budgeting — and occasionally splurging — a lot easier.

Periodic payments offer many of the same advantages as an annuity — minus the assurance that your income will last your lifetime. But if you feel you’ll need the bulk of your income in the early years of retirement, this could be the wise choice.

You’ll also want to weigh the amount you’ll owe in income tax. With a lump sum payout, you must pay the total that’s due at one time, which can substantially reduce the amount you have left to invest. With the other options, you owe federal income tax at your regular rate as you receive the money.


Pension annuities

An annuity is a regular, monthly payment, usually for your lifetime.


  • Option of spreading the payments out over your spouse’s lifetime as well as your own
  • Peace of mind in knowing you will have a steady flow of income


  • Fixed annuities not indexed for inflation, which means that your fixed income will buy less as time goes by. Variable annuities are designed to reflect market performance but produce less predictable returns
  • Income tax due on the amount you get each year
  • In most cases, an annuity choice is irrevocable and you can’t increase your payment or take a lump sum after payments begin
  • Plans could be terminated, leaving you with less than you expected or nothing at all


Periodic payments

Periodic payments are installment payments of roughly equal amounts paid over a specific period, often 5 to 15 years.


  • Assurance of a regular payment at regular intervals
  • Relatively large payments because of limited time frame
  • May be able to roll some but not all payments into an IRA


  • Commitment to payment schedule usually limits ability to get at lump sum, if needed
  • No assurance of lifetime income
  • Might leave yourself or spouse without funds after payments end
  • Large payments over a short time frame could push you into higher tax bracket, increasing the income tax you owe
  • Inflation can erode purchasing power of payments


Lump sum

A lump sum is a cash payment of the money in your retirement account.


  • Control over investing and gifting your assets
  • Not dependent on employer’s financial health


  • Tax due immediately on full amount of payout
  • Possibility of spending too much too quickly
  • Vulnerable to making poor investment decisions
  • No assurance of lifetime income
  • Might leave yourself or spouse without funds if assets are exhausted


IRA rollover

An IRA rollover is a lump sum payment deposited into an IRA account. You can either deposit it yourself or ask your employer to do it directly.


  • Money continues to be tax deferred
  • Allows you to invest as you want and take money as you need it
  • Allows you to postpone withdrawals and continue to build your asset base


  • Depending on your tax rate, you may pay more tax over time than you might have paid on the lump sum
  • Annual required minimum distributions (RMDs) required from tax-deferred accounts when you reach 73
  • Unless transfer made directly by employer, 20% of amount is withheld and must be deposited from other sources to avoid being taxed as a withdrawal


Naming beneficiaries

At the time you’re making payout decisions, you may want to review the primary beneficiary you’ve named on your retirement account and perhaps choose a contingent beneficiary. That would ensure that the person you select would inherit the plan assets directly if you and your primary beneficiary were to die simultaneously.


Meeting minimums

One thing to keep in mind in choosing a payout method is what will happen when you reach 73 and must take RMDs. If you’ve left your assets in your employer’s plan and have selected a lifetime annuity or periodic payments, the plan administrator is responsible for handling your income payments and ensuring that what you receive complies with RMD rules.

If you select an IRA, your custodian will calculate the account value at the end of each year, which is a key element in the formula you use to calculate RMDs. But you’re responsible for determining the required amount and withdrawing it.


More about IRAs

IRS rules spell out the details of taking money out of your IRA.

The first things you have to know about withdrawing from your tax-deferred individual retirement accounts are the numbers. One is the number 59½. Since insurance company actuarial tables consider you already 60 when you reach 59½, Congress used that half-year to frame the withdrawal period from retirement accounts. That’s the point at which you can begin to take money out of your account without paying a penalty.

Being eligible at 59½ doesn’t mean you must start withdrawing then: You can wait until you actually retire — at 62 or 65 or 68 — or until you’re ready to add a source of income to your budget.

The only restriction is that you must begin withdrawing from a traditional IRA by April 1 of the year following the year you reach 73. In fact, you must take at least the required minimum distribution (RMD), based on your life expectancy and the value of your account, in every year from then on.

If you have a Roth IRA, you don’t have to set up a withdrawal plan, or make withdrawals at all, for that matter, if you don’t need the money. Remember, though, that your account has to be open at least five years and you have to be at least 59½ for the withdrawals to be tax free.


When withdrawals are a must

The IRS doesn’t want a traditional IRA to be a way to build the estate you’re planning to leave your heirs. So after you reach age73, the law says you must start spending what you’ve saved — whether you need the money or not. One way to stretch the account (but not bend the rules) is to name a much younger person as your IRA beneficiary. When you die, that person may be able to spread payments from the account over his or her lifetime, extending the benefits for many years.


What you have to take

The rules on withdrawing from a traditional IRA are specific and much simpler than they used to be. Basically, you divide your account balance at the end of the previous calendar year by a number linked to your age. Those numbers are available in tables the IRS provides in Publication 590, “Individual Retirement Arrangements.”

Everyone of the same age divides his or her account value by the same number, with one exception. If you name your spouse as beneficiary, and he or she is more than ten years younger than you are, you can use a different table, which uses a longer life expectancy and requires a smaller annual withdrawal.

If you don’t withdraw, or take less than you should, you are vulnerable to a 25% penalty on the amount you should have taken but didn’t, which can be reduced to 10% if you correct the mistake in a timely manner.


The tax bite

The tax you owe on your traditional IRA withdrawals is figured at your regular tax rate. That’s why you may want to keep investments you expect to grow in value, such as higher-risk stocks and mutual funds, in regular taxable accounts. You don’t owe tax on any increase in their value until you sell, and if you’ve owned them for more than a year, you owe tax at the lower capital gains rate. If your taxable investments are worth less when you sell them than they were when you bought them, you can use the capital loss to reduce other capital gains and even some ordinary income.

You may also want to consider whether to hold dividend-paying stocks in your taxable accounts if the dividends qualify to be taxed at your long-term capital gains rate. Most domestic stocks do qualify, and so do some distributions from certain mutual funds.


When you can start withdrawals

Once you reach age 59½ you can start taking money out of your IRA in any amount you want. You’ll owe tax on the amount you withdraw from a traditional account, but you can spend it any way you like. With a Roth, there’s no tax at all provided your account has been open at least five years and you’re 59½.


Taking it early

The government has done you — and itself — a favor by adding more exceptions to the rule against early withdrawals from your IRA. It won’t cost you a 10% penalty if you take money out of your IRAs to pay higher education expenses, put money down on your first home, support your family while you’re disabled, or if you are in a situation of domestic abuse There are also no penalties for withdrawal if you are terminally ill.

But you will owe taxes at your regular rate, giving the government added revenue. For example, a couple in their 40s who withdraw $100,000 from retirement accounts to pay their child’s college expenses could owe more than 45% of the withdrawal in combined federal and state income taxes.

Before you make that choice, you might compare what it costs to take a home equity loan, with its potentially tax-deductible interest, to the tax bill that comes with taking money out of your IRA. It may turn out that borrowing costs less. Another alternative is to tap your employer-sponsored retirement plans, by borrowing from your 401(k) or similar account. While the amount you can borrow may be limited, the interest you pay goes back into your account, helping to offset loss of potential earnings. Yet another option is to withdraw after-tax money you contributed to a Roth IRA. No tax or penalty is due on that amount, although the drawback is that it will no longer be accumulating earnings.


Early withdrawal without penalty

There is one way to get access to the money in your IRAs before you’re 59½ and avoid the potential 10% penalty. That’s to annuitize your distribution. It means you establish a withdrawal plan that pays you, each year, a fixed amount of the money in your IRA, based on your life expectancy. The chief restriction is that the plan must cover at least five years or all the years left until you reach 59½, whichever is longer. Annuitization does have drawbacks, though. If what you really need is a large amount of money, you probably won’t get it this way unless you’re close to 59½. And you’re using money that was intended for your retirement, so you’re depleting, not adding to, your savings.


This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.

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