Understanding the small print helps you balance the pros and cons of payout options.
There’s no universal right answer about how to take your retirement plan payout. But when you have to make a decision, it helps to know the advantages — and the disadvantages — of your choices.
What the issues are?
The level of comfort you have with making investment decisions is a major consideration in deciding among the various payout alternatives. If you’ve been investing successfully for years, the prospect of building a portfolio you control with a lump sum payout or an IRA rollover can be appealing — and realistic. Your challenge will be producing enough income during retirement.
But if you don’t want to worry about outliving your assets, you may opt for the relative security of an annuity. Knowing that the same amount is coming in on a regular basis makes budgeting — and occasionally splurging — a lot easier.
Another approach is to leave your account in your employer’s plan and take distributions on a schedule that works for you. You might opt for a regular monthly amount or withdraw periodically, provided you’re careful to take your full RMD by year’s end.
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You’ll also want to weigh the amount you’ll owe in income tax. With a lump sum payout, you must pay the total that’s due at one time, which can substantially reduce the amount you have left to invest. With the other options, you owe federal income tax at your regular rate as you receive the money.
Meeting minimums
One thing to keep in mind in choosing a payout method is what will happen when you reach 70½ and must take required minimum distributions (RMDs). If you’ve left your assets in your employer’s plan or have selected a lifetime annuity, the plan administrator is responsible for handling your income payments and ensuring that what you receive complies with RMD rules.
If you select an IRA, your custodian will calculate the account value at the end of each year, which is a key element n the formula you use to calculate RMDs. But you’re responsible for determining the required amount and withdrawing it.
In your corner
Perhaps you’ve lost track of a pension you’re owed from a job you left before you were eligible to retire. Perhaps the employer offering your defined benefit pension has ended its plan. In either case, you can turn to the Pension Benefit Guaranty Corporation (PBGC), a federal agency. If your plan ends, PBGC’s insurance program pays your benefit, though limits apply. And, if you’re owed a pension, PBGC is probably trying to find you. You can contact the agency for more information.
In conclusion
At the time you’re making payout decisions, you may want to review the primary beneficiary you’ve named on your retirement account and perhaps choose a contingent beneficiary. That would ensure that the person you select would inherit the plan assets directly if you and your primary beneficiary were to die simultaneously.
What Are Retirement Payout Choices And How Do They Work? by Inna Rosputnia
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