on a lump-sum pension payout
I am going to be 55 years old and am thinking
of retirement. I am planning on taking a lump sum from my pension
plan, which is around $330,000. If I roll it into an IRA, can I
start withdrawing this money without penalty? And what about tax
consequences? -- Berg
It's all about the tax consequences isn't it?
When an individual separates from employment, he usually
has the option of taking his retirement account in a lump sum or
an annuity over various time frames. Most folks prefer to take the
lump sum distribution and roll it into an IRA that allows them to
gain control of all the funds and invest as they see fit. The roll
out of the funds from the pension plan to the IRA is tax-free. By
annuitizing the funds, you guarantee yourself a set level of income
for a period, such as your expected life span or that of yours and
If you retire after reaching age 55, you can take
the full amount of the lump-sum distribution without being subjected
to the 10-percent penalty for early withdrawals. However, this is
generally not recommended because you'll end up owing a lot of taxes
on money that you probably don't need all at once. Therefore, the
rollover to the IRA is preferable.
Once the funds are in an IRA, you can begin withdrawing
the funds in a fixed periodic payment prior to reaching age 59½
without incurring the additional 10-percent penalty on early withdrawals.
Once you start receiving these payments, you must continue receiving
the periodic payment for five years or your prior distributions
can be subject to the 10-percent penalty.
For example, assume you decide to take the IRA balance
over your expected life span. Based on Table I of Internal
Revenue Service Publication 590, your expected life span
is 29.6 years, so your first distribution for your first year would
be $11,148.65 ($330,000/29.6). You can take these funds monthly
or annually and just pay regular income tax on the funds without
paying the penalty. You should also consult Publication 590 for
other distribution options.