Pension vs Lump Sum - Which One to Take if I Am Not Retired Yet
My question involves labor and employment law for the state of: NY
I recently received a pension package from my former employer. This is the first one I have ever reviewed, and it has 20 pages which requires several signatures. In this example, let's say that I have about 25yrs until retirement, and am very healthy (let's assume I live an additional 20 yrs (85 years old)). I am having trouble finding out if I should take the monthly payment annuity (1) or lump sum (2). For example, if it said that I can take either a monthly $600 life annuity or lump sum of $200k, wouldn't the $200k be the obvious choice if I put it in an IRA with ~6% annual interest?
1) $600 * 12months/yr * (25+20yrs) = $324k over my lifetime
2) $200k w/ annual 6% interest over 25yrs = $893k at age 65yrs
In addition, is there anything else I should look for in this pension package document? I heard that they can sometimes omit important information.
Re: Pension vs Lump Sum - Which One to Take if I Am Not Retired Yet
I'd take the package to a financial and tax advisor. Some pensions in option #1 offer a joint/survivor where it would pay your beneficiary a pension for their lifetime also. I'd look for that if you have a spouse to consider. And are you sure the monthly payment starts immediately or at some early or regular retirement date (i.e. you might be overstating the length of time in #1)?
#1 is irrespective of the market return vs #2 you are taking more financial risk
#1 is assuming you will live 45 years to 85....which may or may not happen
Generally in #1 the employer/plan will continue to pay the funds expenses and #2 the expenses will come out of your investment rate of return or other bank/mutual fund fees.
#2 assumes that you won't touch the IRA for other reasons over those 45 years (and in #1 you can't do that)....are you one that would use this money for things other than actual retirement (and IRAs don't have too many holds on them other than the 10% early withdrawal penalty and tax consequences)
There are pros and cons to either way. I wouldnt' take advice from strangers on the internet. Did the former employer offer any help line to call to discuss?
(I will say I chose #2 when offered, but my lifetime payment at retirement was small AND the amount given was small...I'd only worked there 7 years in the first 7 years of my career - at an HR consulting firm working in pension/401k administration--- so my average wages were pretty low..... yours is a larger amount hence the reason I say you seek advice from someone who is knowledgable and can read the 20 page document)
Re: Pension vs Lump Sum - Which One to Take if I Am Not Retired Yet
I had the same option on two occasions and took the lump sum both times and rolled the money into my IRA.
For no other reason than I prefer having my money in my hands rather than somebody else's. :cool:
Re: Pension vs Lump Sum - Which One to Take if I Am Not Retired Yet
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adjusterjack
I had the same option on two occasions and took the lump sum both times and rolled the money into my IRA.
For no other reason than I prefer having my money in my hands rather than somebody else's. :cool:
Taking the lump sum and rolling it into an IRA is not a bad idea at all, and little different than leaving it in the original retirement vehicle for many purposes. I have no problem with that.
I have a problem with someone neglecting to consider the tax ramifications in cashing out a lump sum and assuming they can do a better job of investing it.
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llworking
Taking the lump sum and rolling it into an IRA is not a bad idea at all, and little different than leaving it in the original retirement vehicle for many purposes. I have no problem with that.
I have a problem with someone neglecting to consider the tax ramifications in cashing out a lump sum and assuming they can do a better job of investing it.
If they roll the cash lump sum to an IRA, there are no current tax ramifications. If they take the cash lump sum directly, yes they would generally owe the 10% early withdrawal penalty (assuming they are around 40 since they said they had 25 more years of work) plus federal and state income taxes. That's why I asked the question on whether they had the fortitude to not touch the IRA until the same retirement age...
As for investing many pension plans for many many years made interest rate assumptions that were much more than 6% and when the market has dropped, those pension plans have become underfunded and some haven't paid out even close to what they have promised, even with PBGC backing.
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hr for me
If they roll the cash lump sum to an IRA, there are no current tax ramifications. If they take the cash lump sum directly, yes they would generally owe the 10% early withdrawal penalty (assuming they are around 40 since they said they had 25 more years of work) plus federal and state income taxes. That's why I asked the question on whether they had the fortitude to not touch the IRA until the same retirement age...
As for investing many pension plans for many many years made interest rate assumptions that were much more than 6% and when the market has dropped, those pension plans have become underfunded and some haven't paid out even close to what they have promised, even with PBGC backing.
That wasn't the point I was making. The point I was making is that if someone cashes out a pension plan on a lump sum basis, instead of rolling it over, then they have to consider that the amount they have to invest is the after tax amount, not the lump sum amount, and then they would have to find a vehicle that gave them a decent rate of return. 6%, in general, is not to be reasonably expect these days.
Re: Pension vs Lump Sum - Which One to Take if I Am Not Retired Yet
OP is not saying he will be cashing out. He is saying that he will roll it over into an IRA. Doesn't he have 60 days to do that without any tax consequences?
As to rate of return, 6% is not so difficult today if invested in good mutual and closed-end funds. A conservative rate today would be 5-5.5%. OP has 25 years to retirement and he can take some risks in the next 10-15 years for higher returns.
I have closed end funds that trade on NYSE that pay 12% and I'm past full retirement age.
I agree with Jack that a bird in the hand is worth two in the bush. Back in 2008, I had lots of rich clients who were cashing out annuities and taking big looses because of the uncertainty of the markets.
Personally, I would never invest in an annuity. All they do is make insurance companies and the agents rich. I can take care of my retirement investments, designate a beneficiary to the accounts, and if I die, my money is not in the hands of an insurance company.
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budwad
OP is not saying he will be cashing out. He is saying that he will roll it over into an IRA. Doesn't he have 60 days to do that without any tax consequences?
As to rate of return, 6% is not so difficult today if invested in good mutual and closed-end funds. A conservative rate today would be 5-5.5%. OP has 25 years to retirement and he can take some risks in the next 10-15 years for higher returns.
I have closed end funds that trade on NYSE that pay 12% and I'm past full retirement age.
I agree with Jack that a bird in the hand is worth two in the bush. Back in 2008, I had lots of rich clients who were cashing out annuities and taking big looses because of the uncertainty of the markets.
Personally, I would never invest in an annuity. All they do is make insurance companies and the agents rich. I can take care of my retirement investments, designate a beneficiary to the accounts, and if I die, my money is not in the hands of an insurance company.
He does have 60 days to put a lump sum into an IRA. However that is NOT what I would recommend. I would recommend a trustee to trustee rollover, where the money never touches his hands.
If it goes through his hands many trustees will insist upon withholding tax and then that much of the money won't be available for a rollover and therefore taxes will have to be paid on that part.
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llworking
If it goes through his hands many trustees will insist upon withholding tax and then that much of the money won't be available for a rollover and therefore taxes will have to be paid on that part.
I never heard that before. If the amount of the payout equals the amount of the roll-over, what withholding are you talking about.
A person can rollover the entire sum from one retirement account to another without withholding. He is not taking any distributions.
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budwad
I never heard that before. If the amount of the payout equals the amount of the roll-over, what withholding are you talking about.
A person can rollover the entire sum from one retirement account to another without withholding. He is not taking any distributions.
Bud, if he takes the money into his hands (the only reason the 60 day rule would apply) then its a distribution as far as the trustee of the original account is concerned. Which is why many of them will insist on withholding. It does not become a rollover until the person actually deposits the money into the new account. Therefore it's given a distribution code 1 on the 1099-R, for early distribution if the person is under age 59 1/2.
A trustee to trustee rollover, on the other hand, is known to the trustee of the original account to be a rollover, and therefore is given a distribution code G, for rollover, on the 1099-R
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llworking
He does have 60 days to put a lump sum into an IRA. However that is NOT what I would recommend. I would recommend a trustee to trustee rollover, where the money never touches his hands.
If it goes through his hands many trustees will insist upon withholding tax and then that much of the money won't be available for a rollover and therefore taxes will have to be paid on that part.
you are mis-stating this a bit... the ex-employee has the choice NOW..... It is not a good idea to take a lump sum and pay taxes now, but to rollover which is what the OP stated they were going to do.
the rollover check is made out to the IRA company FBO (for the benefit of) the employee's name -- NOT directly to the employee's name. The employee CAN'T cash the check even if mailed directly to them and directly in their hands. There is no way for the money to go through his hands while also going to an IRA. The recordkeeper WILL withhold taxes unless the employee gives an IRA company/account...it's the default. But yes, the ex-employee can get cashed out totally and that's a bad idea due to the early withdrawal penalty and taxes....
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hr for me
you are mis-stating this a bit... the ex-employee has the choice NOW..... It is not a good idea to take a lump sum and pay taxes now, but to rollover which is what the OP stated they were going to do.
the rollover check is made out to the IRA company FBO (for the benefit of) the employee's name -- NOT directly to the employee's name. The employee CAN'T cash the check even if mailed directly to them and directly in their hands. There is no way for the money to go through his hands while also going to an IRA. The recordkeeper WILL withhold taxes unless the employee gives an IRA company/account...it's the default. But yes, the ex-employee can get cashed out totally and that's a bad idea due to the early withdrawal penalty and taxes....
You are describing a trustee to trustee rollover. You are NOT describing the type of situation where the 60 day deadline is applicable. The 60 day deadline is applicable when the taxpayer has the choice whether or not to keep the money or roll it over, once it has been released.