Choosing Between a Lump Sum and Periodic Payments

Posted by cskadmin on August 17, 2012

Electing periodic payments or a lump sum will affect a retiree’s financial situation for years to come. News that two large automakers have offered retirees the option of a lump sum payment, instead of receiving regular income from their pension plans, has garnered much media attention. Although many workers do not have pension plans, defined contribution plans may also present a range of withdrawal options when it is time to retire. This scenario raises an interesting question: What factors should retirement plan participants consider when deciding how to take distributions?

A Host of Considerations

Plan participants may want to review the following when confronted with a decision about their retirement plan distributions:

  • With a lump sum, the entire balance usually must be paid in a single tax year. Any amounts not rolled over to a qualified retirement account, such an individual retirement account (IRA), are taxed at current rates.
  • A rollover to an IRA often permits more control over the retirement money compared with leaving it in an employer-sponsored plan. Although IRAs have distribution rules, they frequently offer a broader range of investment options compared with an employer-sponsored plan.
  • A rollover requires you or your financial advisor to make decisions about how the retirement money is invested. In contrast, with your employer-sponsored plan, you may or may not have decision-making responsibility for how the money is invested.
  • An arrangement to receive an ongoing stream of income may lessen the chances that you will outlive your retirement assets. A lump sum that is reinvested may be more volatile, especially during a stock market downturn.
  • A household in which partners or spouses each have employer-sponsored retirement plans usually presents greater flexibility in planning for retirement income. In contrast, a single person without a partner’s assets may need to plan for a greater degree of certainty, with the understanding that all investing involves risk.
  • The age at which a person retires may be a factor. For individuals taking a lump-sum distribution after age 70½, there are Internal Revenue Service rules that determine whether the sum qualifies for preferential tax treatment. A tax advisor can help you determine whether you qualify.
  • Estate planning considerations may come into play. In certain instances, pension plans may pay benefits to a surviving spouse. Typically, pension assets cannot be bequeathed to children. Both IRAs and defined contribution plans, such as a 401(k) plan, can be bequeathed to loved ones who are mandated to follow required minimum distribution rules.

Weighing whether to take period payments or to elect a lump-sum distribution has implications that will affect a retiree’s financial situation for years to come. If you have a choice in your retirement plan distributions, be sure to seek professional advice and review all relevant factors.

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