Caution; How you handle your pension distribution may impact the pension funds you’ll rely on for the next 20 to 30 years of retirement. First, you’ll want to place your lump-sum distribution in the financial vehicle best suited to meet your retirement goal. Secondly, you’ll want to minimize the amount of federal and state taxes and Internal Revenue Service penalties you will pay.
You could receive the lump-sum distribution in a check, but your employer will withhold 20 percent from the total to apply toward federal taxes. And if you’re not yet age 591⁄2, you may incur an additional 10 percent premature distribution penalty.
You could roll the funds into a certificate of deposit, but that’s a temporary solution. When the CD comes due, you’ll once again have to decide what to do with the funds.
A better option may be to roll the funds into an IRA. The funds you place in an IRA grow on a tax-deferred basis under current tax laws and are not taxed until the money is received, often when your income is lower and taxed at a lower rate.
Additionally, IRAs have flexible funding guidelines, so you can choose from annuities, mutual funds and other investment products.
— Jamont McRae, FIC is a managing partner and registered representative with Modern Woodmen of America.