I have ~ 2 months, to decide if I will take a lump sum or monthly pension distribution (for a pension that I had forgot about, from work prior to 1988). I will soon be age 65. I have no "need" for the lump sum cash nor monthly income.
The ditribution options are $51k in cash, or $335 per month. I am interested in the tax consequences, from either option.
As always, most appreciative for all advise!
Well, the most important question is, how much longer are you going to live? (not so much for tax purposes, but to maximize your payout after tax, which the true goal, correct?)
Once we have that nailed down, provide a little more info -- is there any adjustment to the monthly amount for inflation? Survivor benefits? Can the lump sum be rolled into an IRA? What is the rest of your income like? What level of future RMD (required minimum distribution) are you looking at for your existing pre-tax accounts, if any?
Additional considerations:
There is still a potential tax advantage to taking a lump sum distribution, but you're too young to qualify.
How much will the taxability of your Social Security be effected by the pension income? Probably put it at 85% for one year if you take the lump sum; maybe no effect with the periodic payments.
How about your state? In NY you could exclude up to $20K of pension per year, so spreading it out could save money.
Don in Upstate NY
Thank you, for the collective responses.
My parents both lived to be over 88, if that is an indication of my life expectancy. At ~ age 65, I am currently healthy. There is no inflation adjustment, in the payment. There is a spousal benefit. I need to check with the plan administrator, to inquire if there is a Lump sum IRA transfer option. (Thanks for prompting me to ask that question).
I (and my wife) will defer receiving our SS and IRA payments, until the mandatory age. We now receive significant dividend income (>$100k), mainly from three different Dow 30 companies. I expect that they will remain a stable source of dividend income, while they represent significant liquid assests.
We do not "need" any added current income. Our current income places us in one of the top IRS (and CT) tax brackets. We have no long term debt.
immediateannuities.com shows that if the $335 is a joint distribution with your spouse, you should take it.
There may be an inflation factor to the insurance.
Pensions in some states aren't taxed.
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