I turned 55 in 2009 and I just changed jobs. My previous employer has sent me a "Pension Equity Plan Benefit Summary" with the options to either:
- begin a monthly annuity immediately,
- take a lump sum payment, or
- roll over into a 401(k) plan, or other Roth Individual Retirement Account (IRA).
Which makes the most financial sense? I don't need the money now and I plan to work until age 65.
According to FPA member Adam J. Finch, CFP®, of RFC Financial Planners, there is no one answer that is right for everyone regarding this circumstance. "And the right answer for you will depend on the answers to many questions about your particular situation, questions best posed by a financial professional who can help you determine the best action to take," he said.
That said, Finch offered the following thoughts about what you've already shared.
"Since you do not plan on needing this money for another 10 years, I believe it would be best to take the rollover option to fund either an IRA or a Roth IRA rather than a 401(k)," Finch said. "Taking the monthly annuity now would produce taxable income that isn't needed, plus it would lower the future value of money. Taking a lump-sum payment would equate to all of the payments most likely being taxed as income in one tax year, which could be very harmful from a tax perspective, as well as greatly reducing the value of this money to you. Doing a rollover to a 401(k) would be a decent option, as the money would continue to grow on a tax-deferred basis."
Finch suggests that you fund either an IRA or Roth IRA instead because within either of those two accounts you would still continue tax-deferred growth. Plus, you would have more control and flexibility in the investment management of your money, which should lead to better results. "To determine whether to use an IRA or Roth IRA is another question and a tax or investment professional may have an opinion regarding this," he said. "A lot of that question can be determined by the dollar amount that you're dealing with, but also the rest of your financial situation."
Finch said there is another option to consider. You may be able to plan to take the monthly annuity payments, but delay receiving these until when you're ready in 10 years. "If the payments would continue to grow by delaying them and you feel confident that the company/entity has the financial strength to make good in paying these future benefits, it may be an attractive option," Finch said.