At retirement, you may be faced with many decisions about
your pension plan (either employer-provided or your own
self-employed plan). Any number of options are usually
available for these payouts, among them:
An annuity:
An annuity provides a regular income over a period of
time; it is generally paid in monthly installments. However,
the term over which an annuity is paid varies, depending
on how you choose to have payments made. For example, your
employer will probably ask if you want your pension paid
over a ten-year period, over your lifetime, over the combined
lives of you and your beneficiary, etc.
When you receive an annuity from a plan to which you
made contributions that have already been taxed, a part
of each
annuity payment you receive is non-taxable. This is
called your "investment in the contract". When
you have an investment in the contract, special calculations
are
necessary to determine how much of your annuity will
be taxable.
Lump-sum Distribution:
You may be eligible for a special tax computation called "averaging" if
you were born before 1936 and receive the entire balance
in your retirement plan within one tax year. Such
payments are referred to as lump sum distributions
and generally qualify for 10-year averaging. Consideration
must be given to whether it is better to utilize this
special
averaging which requires the tax to be paid up front
or to roll your distribution into an IRA.
Net Unrealized Appreciation:
Some retirees get pension distributions in the form
of company stock which has appreciated in value while
it remained
in the pension plan—this is termed "net unrealized
appreciation." Stock distributions can create
special tax problems. If you receive one, it's a good
idea to check
with your tax advisor about the best way to handle
it.
Rollovers:
A rollover occurs when you get a distribution from one
qualified retirement plan and you redeposit all (or part)
of it into another qualified plan within 60 days. The part
you redeposit is not taxed until you begin to withdraw
from the new plan.
Be watchful for two problems that occur with rollovers:
-
You can't roll over any after-tax contributions received
as part of the distribution from the old plan.
-
Distributions made directly to you can be subject
to income tax withholding. This means that
the actual distribution
received will be less than 100% of the taxable
amount. Rolling over just the amount received often
leads to
an unwelcome surprise or tax preparation time—i.e.,
the withheld amount becomes taxable.
