What your options are when retiring with a company pension

Several options confront the person about to retire with access to a company-funded pension plan. Since the options require some trade-offs, look into the specifics of each before deciding.

1. Taking your pension as monthly payments is similar to having an annuity. You would never outlive the monthly payments, but they will not likely increase to keep pace with inflation, either. Benefits are taxable if you did not contribute to the fund and are partly taxable if you did. Determine the monthly rate you can expect based on your years of service, the plan's formula, and your earnings record. Use this as a base for comparing benefits from other options.

2. Most pension plans permit you to take all benefits as a lump sum when you retire. Generally, this lump-sum payout can be taxed at favorable 10-year averaging rates. This rule allows you to figure the tax on one- tenth of the lump sum at the rates for a single individual and multiply the tax by 10 to arrive at the total tax due. Once the tax is paid, you can invest the cash in any number of opportunities to gain income -- discounted bonds, utility income stocks, money-market mutual funds, insured certificates of deposit -- or whatever. Income from these investments would be taxed at ordinary income rates or, for long-term capital gains, at reduced rates.

3. Rollover of the lump sum into an individual retirement account defers the tax due on pension benefits until the cash and any subsequent income earned in the IRA is withdrawn. You must roll over the pension lump sum into an IRA within 60 days of receiving it. If you roll over the lump sum into an IRA, however, you may no longer take advantage of the favorable 10-year-averaging rule.

Which option you choose depends on numerous variables -- more than I can cover in this brief summary. The most important to you are:

* Overall earning rate of your pension, considering taxes. Compare your pension payout after taxes with other options. Your monthly benefits will be based on actuarial tables -- like an annuity. These plans are often administered by insurance companies, which base payouts on ultraconservative yields. You should figure how many investable dollars you would receive after taxes are paid on a lump-sum payout and the return you would gain from those funds. This trade-off requires calculations. Suppose you were promised a monthly benefit of $500 -- before taxes. If you elect to take a lump-sum payout , the before-tax amount might be $80,000. After taxes, investable funds might be $60,000. Income from that $60,000 would need to yield 10 percent ($6,000 a year or $500 a month). Many opportunities are available in today's markets to gain more than 10 percent before-tax yields. A yield of 14 percent would increase monthly before-tax benefits to $700 a month. A big benefit could be your control of the funds and the option to change investments as opportunities opened or to spend part of the capital each year in addition to the income. Any residual capital left at death would be part of your estate.

* Rolling over the lump sum into an IRA defers the taxes. If you should select a self- directed IRA on which you control the investments, the greater capital sum before taxes could increase income. Any withdrawals, of course, are taxed for that year. But taxes are paid at a joint rate if you and your spouse file jointly -- one small benefit over the 10-year-averaging rule. You can also spread out withdrawals over a longer period than 10 years to ease the tax burden even more.

Before deciding on yo ur course of action, check the numbers.

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