Tax implications of lump-sum pension distribution

[Weedy Acres]

I have a pension with a former employer that will pay out around $1000/mo when I turn 65.  They are offering a lump-sum payment now of ~65,000.  I did the math and it makes sense from a rate-of-return standpoint to take the lump sum and invest it myself. 

I believe I can roll it into an IRA and avoid any taxes.  But if I don't, will it be taxed as a pension distribution?  This is kind of like ordinary income, but I live in Illinois, which does not tax pension distributions.  So if I don't roll it into an IRA, will I get it tax free?

The reason for not putting it into an IRA would be to fund a business investment about a year from now. 

[MayDay]

I just took a lump sum from a former employer.  My paperwork said I could roll it into an Ira, or I could take it as cash and pay income taxes plus 10% penalty. 

I am obviously rolling it over.  Mine was a paltry 7500$. 

[retired?]

would still have Fed taxes.

MayDay - you had a penalty?  Was it a forced payout?  i.e. you could not leave it there.

Next year I will have to take a partial payout since I failed to choose an alternative by the deadline.  Sucks enough to pay taxes now, but I cannot roll this component into an IRA.  Given that, it seems unreasonable to have a penalty.

[MayDay]

would still have Fed taxes.

MayDay - you had a penalty?  Was it a forced payout?  i.e. you could not leave it there.

Next year I will have to take a partial payout since I failed to choose an alternative by the deadline.  Sucks enough to pay taxes now, but I cannot roll this component into an IRA.  Given that, it seems unreasonable to have a penalty.

It was not forced.  I could choose pension starting now, lump sum now, or pension starting at age 59+.  If I did nothing, I got pension at 59+.

My amounts were calculated with 7% interest! and since I'm pretty young I decided I would rather manage the money myself and not risk the company going under at some point in the next 50 years. 

[Weedy Acres]

Good point on the federal income taxes.  I assume the 10% penalty is theirs too, not the state's.  Guess I'll roll it into my IRA. 

The implicit ROR on mine was under 5%, so I'm definitely doing the lump sum.