Each year, millions of employees become eligible for a lump-sum
payment from their employer’s retirement plan as they change jobs,
leave the workforce, or retire.
Each year, millions of employees become eligible for a lump-sum payment from their employer’s retirement plan as they change jobs, leave the workforce, or retire. For many of these people, this money is the largest financial asset they own and may be their only private source of retirement income – income that must last for the rest of their life.
People eligible for lump-sum payments can choose how to handle the payment from among many options. Here are six of the most common ways:
1. Take the money in one lump-sum cash payment.
2. Leave the money in the former employer’s plan.
3. Move the money to the new employer’s plan.
4. Transfer the money into a “conduit” IRA, then later to new employer’s plan.
5. Transfer the money directly into an IRA.
6. Take a cash payment and transfer it to an IRA within 60 days.
Each option has financial advantages and disadvantages. Each has a different impact on household income, tax liability and preservation of pension benefits. Some of these options create different estate values or survivor benefits.
Some maximize current income, but create no estate value. On the flip side, others create no income, but preserve estate value and spousal benefits. When you add the impacts of employer stock options, the permutations can appear endless. Which option should you choose?
The choice may depend on whether you are a job changer or a retiree. The most popular options selected by job changers, in order, are: to transfer the money to an IRA, take the cash payment, or to leave the money in the plan.
For retirees, the most popular choices are: to transfer the money to an IRA, leave the money in the plan, take the money in installment payments, or take the money in a lump-sum.
Research indicates that the majority of people base their decision on the advice of family, friends and their own analysis. Few seek the advice of a qualified financial professional. This could be the reason why many people confronted with the “lump-sum conundrum” make choices that end up costing them money and reducing their asset value.
The option you choose could be the right one. But if you pick the wrong option for your situation, it can have unintended financial consequences. Before you choose, get the advice of a financial professional and ensure that your hard-earned retirement money stays in your pocket.
Eric Heckman is president of Heckman Financial & Ins. Services, Inc. Eric is a CFP®, ChFC, CLU brings a wealth of knowledge and more than 13 years of experience to the field of financial planning. You can contact Eric at www.WealthCreator.com or 297-9800.
