Pension survivor benefits

[explanade]

My father passed away and his pension goes to my mother as a single life annuity, according to the papers from his former employer.

There is also a lump sum death benefit.

There is a Pension Rollover Election Form which has 3 options:

1. Taxable distribution paid directly to the survivor
2. Direct Rollover of the taxable portion of the distribution to an IRA or an employer-sponsored retirement account.
3. Partial Direct Rollover of the Taxable Portion of the distribution.

I guess the main advantage of rolling it over to an IRA is to defer taxes?

But my mother is 83 and already taking RMDs from her IRA, so even if she pays taxes now at least she'll have that money to use now.

Otherwise, her IRA will grow and that just means leaving more money for her heirs (actually there is a family trust).

Has anyone encountered this kind of a situation, a pension being inherited by a survivor (spouse) and then having to choose whether to roll it over to an IRA or take the money directly?

My father was taking the payments directly, though it was just a small part of their income so it didn't affect their lives much.

 

[pb4uski]

Is the lump sum in lieu of continuing benefit payments? If so, then the best answer depends on your mom's health and expected longevity, the relationship of the monthly payments to the lump sum compared to SPIA pricing, whether the benefits are COLAed, etc.

 

[Big_Hitter]

the rollover is only for the lump sum death benefit, right?

those are typically modest and used to cover burial expenses.

 

[Big_Hitter]

Is the lump sum in lieu of continuing benefit payments? If so, then the best answer depends on your mom's health and expected longevity, the relationship of the monthly payments to the lump sum compared to SPIA pricing, whether the benefits are COLAed, etc.

I'd be shocked if the lump sum is based on the survivor annuity.

 

[explanade]

Lump sum is called a "death benefit."

 

[Sunset]

How much is the "death benefit" ?

These choices might be a silly choice if the amount is small.

 

[explanade]

Low 5 figures.

 

[Clone]

My pension has several features. There is a life insurance element that will pay out something like $45,000 when I die. There is also a 75% survivor's benefit pension for my wife, should she outlive me. It is possible that OP's situation is similar, but with the option of a lump sum instead of an annuity.

I had to choose from several options at the time of retirement as to how the pension would work. No survivor benefit, 75%, or 60%. Obviously, the amount of the benefit would change accordingly. Next, SS offset or not. With the offset, the pension would pay more until age 62, then less (such that if you took SS at age 62, it would be a near constant payment). With no offset it was the same amount until you expired.

 

[pb4uski]

Low 5 figures.

Then why fret... seems all decisions are ok and none are particularly advantageous.

 

[Sunset]

I would go for #2 Direct Rollover of the taxable portion of the distribution to an IRA

This way even if the amount is low, it can be chosen when to take it out, maybe there is a small tax savings by spreading it over 2 or 4 years vs an all at once payment.

 

[explanade]

My parents were taking RMDs from their IRAs.

They were not going to exhaust those IRA balances by taking RMDs.

I understand they can withdraw more but they'd obviously pay more in taxes?

Or maybe roll it over to IRA and spend after-tax funds with the expectation that the IRA balances will go to the beneficiaries and with estate taxes and step up basis, the heirs get it tax free?

Or do the estate tax and step-up basis laws not apply to retirement accounts like IRAs?

 

[Sunset]

I believe step-up basis only applies to things outside tax-sheltered accounts, so IRA's would not step up as there is no basis involved in IRA withdrawals (although there is a pre-tax and post-tax issue).

My thinking had been, lets pretend the RMD took them to within $5K of the top of the 15% tax bracket. The lump sum is $20K.
If they do RMD + lump sum then $15K of the lump sum is taxed at 25%.

If the lumpsum was dropped into an IRA, then they took out the normal RMD +$5K more for four years it would always be taxed at 15%.

This is a total saving of $1,500

This idea only works if they are near a higher tax bracket.