Who wouldn't love another lump sum vs. pension question?

[LRDave]

Mega-corp - solid company, plan is well funded.

Lump sum: $67,552
Single life annuity: $400/month
5-year guarantee payout to you/survivor: $398

I've back-tested this on immediatebannuities and the monthly payout is better than the single quote by about 20%. Testing the other way, I would need about $82K to get the same single life annuity payout. (Age 62 male.)

My thinking based on the above is that I'd still just get the lump sum and manage it myself.

This gave me pause for thought. I've just realized that the state I live in (AL) does not tax defined benefit pensions. I knew this for state and government pensions (DW will have one and already part of the calculus), but I didn't see the small private pension angle.

If I take the lump sum, is that bucket forever exempt from state income tax? If I were to roll it into my IRA, wouldn't it get lost? I've googled to no avail - wondering if anyone else had any experience in state that exempts defined benefit pension but not IRA/401(K), etc. income.

Are lump-sum payments usually rolled into existing IRAs? (likely a dumb question...)

TIA for any insights anyone can offer.

[Sunset]

You can have as many IRA's as you like, so you can open a ROLLOVER IRA for the lumpsum to sit inside and be separate.

Will that count for State tax free status, I have no idea, as it's still an IRA withdrawal when you are "retired".

I would go with the monthly payout, it's a Really Great deal.. especially with the 5yr payout guarantee. In 14 yrs they will have paid out the lumpsum, imagine if you live 30 more year.

[njhowie]

Quote:

Originally Posted by LRDave Mega-corp - solid company, plan is well funded. Lump sum: $67,552 Single life annuity: $400/month 5-year guarantee payout to you/survivor: $398 I've back-tested this on immediatebannuities and the monthly payout is better than the single quote by about 20%. Testing the other way, I would need about $82K to get the same single life annuity payout. (Age 62 male.) My thinking based on the above is that I'd still just get the lump sum and manage it myself.

Your administrator should be providing you with the forms to initiate distributions and with each option, it should indicate the relative value to the single life annuity - this is an IRS requirement. So, for the lump sum, it should have a statement in that paragraph to the effect of "The relative value of this benefit to the Single Life Annuity is X%." Along with this, there should be a paragraph indicating what the parameters to determine the Relative Value are. For example, here is the paragraph right off of DW's:

Quote:

Relative Value: IRS Regulations require that we show you the "relative value" of each payment option below as a percent of the Single Life Annuity. This demonstrates the expected "value" of the benefit payment options. The Single Life Annuity is given a value of 100%. To calculate the value of each other payment option, including lump sums, we used an interest rate of 2.05% for the first 5 years, 3.61% for the next 15 years, and 4.27% for all additional years and an assumed life expectancy. The actual difference in the value of the payment methods will depend on how long you (and, if appropriate, your beneficiary) lives. See below for the "value" of each benefit payment option compared to the Single Life Annuity. Because each person's circumstances are unique, a benefit election should not be made solely on the relative value of that election.

Quote:

This gave me pause for thought. I've just realized that the state I live in (AL) does not tax defined benefit pensions. I knew this for state and government pensions (DW will have one and already part of the calculus), but I didn't see the small private pension angle. If I take the lump sum, is that bucket forever exempt from state income tax? If I were to roll it into my IRA, wouldn't it get lost? I've googled to no avail - wondering if anyone else had any experience in state that exempts defined benefit pension but not IRA/401(K), etc. income.

It shouldn't be difficult to keep track of - you'll have the amount of your lump sum distribution, that will remain fixed. Any gains on it going forward will be taxable (I'm assuming we're talking about traditional rollover IRA here).

Quote:

Are lump-sum payments usually rolled into existing IRAs? (likely a dumb question...)

Both DW and I have done that with our lump sum distributions. If you wanted to and saw some reason for it, you could put it in to a new rollover IRA.

[LRDave]

I've found a thread on an Intuit MB that indicates that if the lump sum is rolled into an IRA, it loses its tax-exempt status. These are MB comments, so not ironclad, but another thing in favor of the pension. State income tax is basically 5%.

[pb4uski]

I agree. Reconsider taking the pension if you intend to stay in Alabama.

Quote:

Pensions: Retiring to Alabama can be a smart move if you’ll be relying heavily on a pension in your golden years. If you’re retiring from the private sector, Alabama won’t tax your pension income if it comes from a defined benefit retirement plan. The state also exempts military retirement pay and income from a long list of government pensions. 401(k)s and IRAs: While the Yellowhammer State is pretty good to retirees when it comes to taxes, it doesn’t exempt all retirement income. Distributions from 401(k) plans and IRAs are taxed as ordinary income.

https://www.kiplinger.com/slideshow/...ion/index.html