When people receive a financial windfall, the standard advice is simple: Put the money in some safe parking place and take your time deciding what you want to do with it.
That principle is sound, advisers on matters of personal finance agree, in cases where you hit the lottery or receive an unexpected inheritance.But it is less helpful on the much more common occasions when people get what is known as "lump-sum distributions" from a pension or profit-sharing plan.
By law, you have just 60 days to decide whether to keep the money, and pay taxes on the proceeds, or to stash it in a "rollover" individual retirement account.
And that 60-day limit is iron-clad. In a recent case, the Internal Revenue Service said it couldn't make an exception for a taxpayer whose check was written on time but not deposited because of a clerical error at a bank.
"Taxpayers wishing to make tax-free IRA rollovers must be alert and make certain that the 60-day rule is satisfied," observed the accounting firm of Deloitte Haskins & Sells.
Lump-sum distributions can occur in any one of several circumstances: For example, if you retire, or leave one employer where you are vested in the pension plan for another job.
A distribution may also crop up through no act of your own volition if, say, your employer is acquired by another company and the organization being taken over terminates its retirement plan.
For whatever reason, let's suppose you have a check for $50,000 coming. There are probably lots of uses you could think of for that money right away. But you should bear in mind that you won't get to keep all of it.
As the investment firm of Shearson Lehman Hutton points out in a recently published booklet on the subject, "Your lump sum is included in your ordinary income and subject to tax at your ordinary income tax rates.
"Remember - the amount of your distribution can push you into a higher bracket."
Furthermore, if the distribution incurs a 10 percent penalty for withdrawal before age 59 1/2, as some retirement savings programs do, you could wind up owing as much as $22,500 of the total to Uncle Sam.
There are ways to reduce the tax bill by using special rates available to people who reached the age of 50 before Jan. 1, 1986, the year a sweeping tax bill curtailed those benefits.
If you plan to avail yourself of those special rates, you may well want to consult a professional adviser. "The rules on special tax treatment get very complicated, and for every rule there's an exception," Shearson says.
People of any age can avoid current taxes by rolling the distribution over into an individual retirement account within the 60-day limit.
If you're relatively young, that means tying the money up. It also, however, keeps your retirement planning intact.
If you're 59 1/2 years of age or older, you can tap the rollover IRA whenever you want to, incurring taxes at ordinary income rates only on the amount you withdraw.
Unlike conventional IRAs, which limit annual contributions to $2,000 per worker, a rollover IRA can be started with any amount. Like conventional IRAs, rollover accounts offer the allure of tax-free compounding of interest, dividends or capital gains.
If you become aware of an impending lump-sum distribution, financial advisers say, it makes sense to do as much planning as possible in advance.
If the check arrives on short notice, they add, there's no need to panic, but you should start weighing your options without delay.