Author Topic: Tax implications of lump-sum pension distribution  (Read 2042 times)

Weedy Acres

  • Bristles
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Tax implications of lump-sum pension distribution
« on: October 08, 2014, 08:17:34 AM »
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

  • Magnum Stache
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Re: Tax implications of lump-sum pension distribution
« Reply #1 on: October 08, 2014, 08:54:04 AM »
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?

  • Pencil Stache
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Re: Tax implications of lump-sum pension distribution
« Reply #2 on: October 08, 2014, 09:01:43 AM »
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

  • Magnum Stache
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Re: Tax implications of lump-sum pension distribution
« Reply #3 on: October 08, 2014, 09:42:10 AM »
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

  • Bristles
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Re: Tax implications of lump-sum pension distribution
« Reply #4 on: October 08, 2014, 12:35:27 PM »
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.