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Lump Sum Retirement

Updated on June 4, 2009

If your employer offers a defined benefit plan or pension plan, your benefits are usually in the form of a monthly payment that starts when you retire. However, most plans allow payment of this benefit in many forms, including a lump sum payment.

If you take your pension in a lump sum and invest it until retirement, it will increase enough to pay your monthly benefit at retirement age. So the closer you are to your pension plan to date, the less time the money has to grow, the larger the Lump Sum is needed to provide the benefit. On the other hand, if you are young, and farther away from retirement, your lump sum can be surprisingly low. Almost all American retirment plans automatically pay your benefit in a lump sum if the amount is under $ 5000. It is much easier for the retirement plans to pay you the small amount, then to keep track of it year over yea until you retire. If you are due a benefit from an American pension plan, and you are thinking of a lump sum, remember that the IRS will retain at least 20% of your distribution, and the amount paid is considered to be taxable income. You can avoid the withholding and tax expenses by choosing to "roll over" your lump sum to an individual retirement account (IRA). If you thinking of taking a lump sum or any other form of retirement benefits, do not forget to talk to your financial planner or tax adviser!

If you are deciding whether or not to take a lump sum benefit as opposed to a pension, one of the main factors that should be considered is your physical health. A normal pension will make a monthly payment for you until you die. If you are in poor health, it may be more advantageous to take a Lump Sum, to enjoy the full value of your pension now. But if you live a long time, you could enjoy a better value to a monthly pension for a long period of time. The health of your spouse could also be a factor.

Most plans offer joint pensions, which could prolong the monthly payments to your spouse if you were to die first. So if your spouse is healthy, you might consider a J & S instead of a lump-sum pension. Your spouse may also be legally beneficiary of the plan, so it is important for you and your spouse to understand the consequences of choosing a lump sum payment or some other form of annuity. If you are married and your lump sum payment will be over $ 5000, you could also have your payment signed by your spouse and a notary public, since both of you waive your right to future benefits retirement.

Remember that your choice to receive a pension plan is one of the most important financial decisions. Before completing your forms to receive your benefit, meet with your financial adviser or tax adviser to make sure you understand all the consequences and benefits of each payment option.


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    • profile image

      lina reyes 

      6 years ago

      We are now inUs , how can my husband apply for his retirement benefit on line. He is now 68 years old.

    • glgoyal profile image


      8 years ago from India

      usefull post


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