Should I cash out my pension?November 6, 2012: 6:30 AM ET
My company is offering a lump sum payout of my pension. The payout is $261,000 and can be rolled over to a traditional or Roth IRA. Will I have to pay taxes on a Roth rollover? If I don't take the payout, one option is to receive $1,577 monthly in a single-life annuity starting at age 60. I will turn 60 in December and my wife is one year younger. We will continue working until at least age 62. My wife and I currently have $700,000 in retirement savings (mostly traditional IRAs) and plan on working at least another two years. We are debt free except for our home mortgage of $215,000. Should I take the payout or stay with the monthly payment? — Carl
The advantage of taking a lump-sum payout is that you retain full control over those assets. And unlike an annuity, you can pass any leftover money to your heirs when you die. But taking the pension in a lump sum also means that you'll be responsible for managing those assets. "You have to ask yourself whether you want the responsibility and risk of handling this money, or whether you want the certainty that comes with a guaranteed monthly pension," says Lyle Benson, a CPA and president of Baltimore-based tax and financial planning firm L.K. Benson & Co.
One other factor to consider is your life expectancy. If you're in a great health and feel confident that you'll outlast the life expectancy used by your pension administrator to calculate your pension, then the annuity might be a better option. However, single-life annuities come with a drawback: that money ceases to be paid out when you die. For that reason, Benson recommends trying to switch to a joint-and-survivor annuity if you opt not to cash out. Although your monthly payment would be smaller, those payments would continue to your spouse if you die before her.
Benson also notes that rolling over a lump-sum pension payout to a Roth IRA would trigger taxes on the full amount. Because your tax bracket is probably higher now than it will be when you're retired, you're likely to be better off deferring that tax bill for now and rolling your pension assets into a traditional IRA.
— Marc Mewshaw
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