Give those dollars the opportunity for further tax-deferred growth.
A big payout leads to a big question. If you are taking a lump sum pension payout from your former employer, what is the next step for that money? It will be integral to your retirement; how can you make it work harder for you?
Rolling it over might be the right thing to do. If you don’t have substantial retirement savings, that lump sum may be just what you need. The key is to plan to keep it growing. That money shouldn’t just sit there.
Even tame inflation whittles away at the value of money over time. Most corporate pension payments aren’t inflation-indexed, so those monthly payments eventually purchase less and less. Lump sums are just as susceptible: if you receive $100,000 today, that $100,000 will buy 50% less by 2028 assuming consistent 3% inflation (and that is quite an optimistic assumption).1,2
Putting it in the bank might cause you some financial pain. If you just take your lump sum payout and deposit it, all that money will be considered taxable income by the IRS. (There are very few exceptions to that rule.) Moreover, you won’t get the whole amount that way: per IRS regulations, your employer must withhold 20% of it.2,3
Don’t you want to postpone paying taxes on those assets? By arranging a rollover of your lump sum distribution to a traditional IRA, you may defer tax on those dollars. You can even defer tax on a distribution already paid to you if you roll over the taxable amount to an IRA within 60 days after receipt of the payout.3
In doing so, you are keeping those assets in a tax-deferred account. They can be invested as you like, and that money will not be taxed until it is withdrawn. (You may only transfer a lump sum distribution from a company pension plan into a traditional IRA – you may not transfer it to a Roth IRA.)4
If you are considering taking a lump sum payout, make sure you position that money for additional tax-deferred growth. Talk to an investor coach who can help you with the paperwork and get your IRA rollover going.
Citations.
1 – money.cnn.com/2012/09/01/pf/expert/pension-payments.moneymag/index.html [9/1/12]
2 – www.kiplinger.com/article/retirement/T037-C000-S002-pensions-take-a-lump-sum-or-not.html [9/11]
3 – www.irs.gov/taxtopics/tc412.html [1/4/13]
4 – www.fool.com/retirement/manageretirement/manageretirement2.htm [1/21/13]
All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. This material was prepared by MarketingLibrary.Net Inc., for Stonecreek Wealth Advisors, Inc. an independent fee-only Registered Investment Adviser. Salt Lake City, Provo, Utah. Mark Lund is a Wealth Management Advisor, Investor Coach and author of The Effective Investor.
