If you recently received a letter offering you a lump sum distribution or an annuity from a former pension plan, you may be trying to weigh your best options.
Your former employer can inform you of the choices available to you, but they are not able to offer guidance about what choice will be best for your own situation. Here are some things to consider as you make your decision on choosing a lump sum or annuity from your pension.
If you choose an annuity you will receive a monthly check for the rest of your life. With this option, you do not have to worry about how to invest your monthly or whether you will outlive your savings.
The biggest drawback is that annuities are rarely indexed for inflation so your monthly benefit will lose buying power over time. Once a fixed annuity is annuitized (converted to a stream of income), your principal is committed to the insurer.
In a low interest-rate environment, like we currently have, choosing an annuity means you may be locking into a low rate of return for the rest of your life.
A one- time payment offers the ability to control your income stream and plan for your income taxes.
The most important thing about this choice is to be aware of possible taxable events.
In order to avoid tax on the lump-sum distribution, you will need to roll the funds directly into an IRA account. Once the funds are in the IRA account you will need to decide on how to invest them: either on your own or with the help of an investment advisor.
Overall the Lump Sum choice gives you more flexibility as you move forward. It is always advisable to have at least six to nine months of living expenses set aside in a liquid savings account, and if the funds are tied up in an annuity you may face steep penalties if you try to get the funds out.
On the IRA side, any distribution you take from the IRA before age 59 1/2 is subject to a 10% penalty.
If you leave the funds in the IRA account until age 72 you will be required to begin minimum distributions each year.
Your decision should be based on your unique needs, so an overview of your financial situation is a primary consideration.
If you need guidance with making a decision about the choices you are offered, call our office to consult with us.
Bill Canty, CFP®, CPA
Maureen Walsh, EA, Investment Advisor Rep.
Tina Alteri, CPA, Tax Advisor
Ed Canty, CFP®
Joe Canty, Investment Advisor Rep.