Name: Richard M.
Thanks for your question, Richard. I realize you just asked two simple questions, but there’s a lot of important stuff here. While I’m sure some flowing post with beautiful paragraphs would be a good idea, I’m going to answer this with a large number of non-sequitur bullet points. At least I’m honest.
- The process you are describing is called a rollover. It is a very common financial concept. The lump-sum can be deposited into an IRA Rollover account. This exchange will not create a taxable event. You will only owe tax, once you take a withdraw from the IRA. As long as you are 59 1/2 or older, you can make the withdraws without a 10% early withdraw penalty.
- Before you take the lump sum, there’s a lot you need to think about. I talk about this at great length in my book, Mock Retirement. This isn’t to suggest that you buy the book, but if the shoe fits… You need to decide whether or not you want the risk and responsibility that comes with taking the lump sum withdraw. I find that many people don’t realize what they’re getting themselves into, in this regard. One of the smartest things for you to measure is how much your pension would be on an annual basis, in relation to the lump sum. For instance, if the lump sum is $500,000, but the annual pension payment was $40,000, then I’d strongly consider taking the annual pension payment. That’s because it’s paying at an 8% rate. You wouldn’t be able to come close to this, by investing your lump sum on your own. There are several other things to consider too, such as survivor needs and your faith in the pension plan.
- While I can’t give you an exact financial advisor referral, I highly recommend that you interview two or three prior to making your decision. Here’s what to look for in a financial advisor. I recommend you ask your friends who they use, and then ask them why they like these advisors. If the qualities match the qualities on the link I posted in the previous sentence, then you might be on the right track.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.