Things to Consider When Planning for Retirement: Pension Benefit & Retirement Distribution Options

retirement pension benefits distribution

One of the hardest parts of retirement can be determining how to receive your pension benefits and selecting your retirement distribution options. Before starting your distributions, you’ll need to make decisions about how you’ll use the savings you’ve accumulated and when to start taking distributions, in conjunction with identifying how long your money will need to last. Without careful retirement planning, your retirement savings can dwindle at a rate that you are not prepared for. Each individual’s circumstances are personal and unique, and what is best for you will vary significantly based on your retirement goals.

Retirement distribution can be complex and there are a lot of rules. There are three main classes of retirement plans: defined benefit plans, defined contribution plans, and individual retirement accounts (IRAs). The type of plan(s) you have will determine your options for getting the most out of your retirement savings.

Defined Benefit Plan

A defined benefit plan, also known as a pension, is a specific benefit some employers pay to their employees once they retire. A pension provides specific and guaranteed retirement income, typically based on years of employment, salary, and a percentage multiplier. A retiree may choose to either receive a lump sum payment, or an annuity, paid monthly. There are options to receive an annuity for the duration of your life, and upon death, for your spouse to also receive a percentage of the annuity. There is also an option to collect for the remainder of your life only, with no survivors benefit. No matter which option you choose, the employer expects that the cost should average out to be exactly the same.

Defined Contribution Plan

Defined contribution plans are far more common than defined benefit plans. While a defined contribution plan may have many different names, they are most commonly referred to as a 401(k), 403(b), or Thrift Savings Plan (TSP) for federal employees. The general rule is that any money you take out of your 401(k) plan before you reach age 59 1/2 is considered an early distribution and you will have to pay a penalty, plus income tax on it. You may choose to receive a lump sum payment, annual installments, or an annuity from your 401(k).

If you receive a lump sum payment, you may take the money immediately and pay income taxes on it immediately, you may roll the money over into a traditional IRA and continue tax deferral, or you may do a combination of both options. If you receive annual installments, you will receive the market value of a certain number of shares you hold in your investment accounts each year (depending on the number of installments you choose), and the size of the installment will be solely based on the share value of your investment accounts on the day the payments are made. Finally, if you receive your retirement savings in an annuity, all payments will be taxed as ordinary income when received, and are not eligible for transfer to an IRA.

Individual Retirement Accounts

There are two main individual retirement accounts (IRAs)— a traditional IRA and a Roth IRA. Distributions from a traditional IRA become mandatory the year you turn 70 ½ years of age, and during that year, you must make one whole year’s withdrawal for that calendar year. It is important to make timely withdrawals from your IRA because if you miss a required distribution, you will forfeit half of the amount you should have withdrawn but didn’t. There are no required distributions for Roth IRAs. This is important because a Roth IRA can contain a much larger amount at your death than a comparable traditional IRA, which means more money passes to your estate.

Choosing a distribution option for your pension and retirement savings is a significant decision that can have serious financial and tax implications. Usually, once an option is selected, that election cannot be altered or changed for any reason; therefore, it is best to consult an experienced attorney who can provide advice and guidance specific to your specific situation. For all of your estate planning needs, post a short summary of your legal needs on for free, and let the perfect attorney come to you!

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Posted - 09/08/2016