You’ve Accepted the Pension Lump Sum: Now What?

By: Kevin Dombrowski

As previous published in the Delaware Business Times

December 18, 2017

I previously wrote about the decision-making process to take a lump sum pension offer or to remain in your company’s pension plan.  If you consider taking your company’s lump sum pension offer, there are several investment options available to you depending on your unique situation.

Keep the cash. When you take a lump sum pension payout, it will be paid to you as ordinary income and thus taxed as ordinary income (not to mention an additional 10% early payment tax penalty under current IRS rules for individuals 59 ½ or younger).  You can do what you wish with the payment today, but understand that the purpose of this pool of money is to help you prepare for retirement.  Tax rules have been designed to encourage you to do just that by investing in a tax deferred solution.

Invest in an IRA Rollover.  When you select a lump sum payment, one of the most popular ways to defer taxes, maintain some control, and invest for long term appreciation is to roll your new assets into an IRA.  An IRA rollover allows for earnings to continue to grow tax deferred until you withdraw them in retirement.  Additionally, an IRA may provide you with access to extensive investment options where you can choose those that best fit your needs.  After opening a regular IRA (Rollover), you have the potential to convert all or a portion of the resulting IRA account to a Roth IRA account at an opportune time., This can be a helpful retirement planning strategy as under current IRS rules, a Roth IRA does not have required minimum distributions during the owner’s lifetime.

Roll the assets into your company’s current 401k Plan.  Some companies allow active employees to roll their assets directly into the company’s sponsored 401k plan.  If your plan sponsor allows for this, you have an opportunity to move the entire lump sum into the 401k plan, while deferring taxes.  This option allows for an individual to keep their retirement savings in one place, assuming they are happy with the 401k plan currently provided.

Buy a Qualified Annuity.  Some companies set up variations of qualified annuities for their employees to purchase with their pension lump sum.  As insurance contracts, annuities may provide options like death benefits and monthly income payments.  Since these vehicles are structured similarly to a standard pension payment, you can evaluate them against the original pension’s payment structure to see how they stack up, considering fees.

Ultimately, the decision will depend on which option above provides you with the best fit for your overall long-term financial and retirement plan.


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