Which Roger
Thinks s/he gets paid by the post
- Joined
- Jun 5, 2013
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One factor to consider in deciding between a lump sum and annuity for a pension, which I haven't seen mentioned elsewhere in this forum, is that pension income is subject to state income tax in some states, but not in others. In Illinois, for example, pension income is not subject to the 5% state income tax, but IRA withdrawals are taxable at that rate.
This means that when deciding between taking a lump sum and rolling it into an IRA, or taking a monthly payment, an Illinois resident should subtract 5% from the lump sum amount when doing the math to decide between the two options, whereas someone who lives in a state where pension income is taxable would not make this adjustment. For someone in Illinois, this swings the pendulum somewhat in the direction of taking the annuity.
But for younger ERs, another factor, PBGC limits, may swing the pendulum in the other direction. The PBGC limit is based on the pension recipient's age at the time the company holding the pension goes bankrupt, and the limit increases with age. In my case (age 52) the limit is about 300 dollars per month less than the monthly pension amount I will receive when I retire soon. My break-even point is age 56 - if my company goes bankrupt any time after that, I will be guaranteed my full pension amount.
In my case, although it's certainly possible that my company will go bankrupt at some point, it's much more likely to happen a few years down the road than next year or the year after, so I feel like the state tax break outweighs the risk of a low PBGC payment.
Now somebody please correct me if I've missed anything or (even worse) mis-interpreted something.
This means that when deciding between taking a lump sum and rolling it into an IRA, or taking a monthly payment, an Illinois resident should subtract 5% from the lump sum amount when doing the math to decide between the two options, whereas someone who lives in a state where pension income is taxable would not make this adjustment. For someone in Illinois, this swings the pendulum somewhat in the direction of taking the annuity.
But for younger ERs, another factor, PBGC limits, may swing the pendulum in the other direction. The PBGC limit is based on the pension recipient's age at the time the company holding the pension goes bankrupt, and the limit increases with age. In my case (age 52) the limit is about 300 dollars per month less than the monthly pension amount I will receive when I retire soon. My break-even point is age 56 - if my company goes bankrupt any time after that, I will be guaranteed my full pension amount.
In my case, although it's certainly possible that my company will go bankrupt at some point, it's much more likely to happen a few years down the road than next year or the year after, so I feel like the state tax break outweighs the risk of a low PBGC payment.
Now somebody please correct me if I've missed anything or (even worse) mis-interpreted something.