Pension annuity payout
A former employer had a pension plan that I was vested in. Sometime after I left, this employer turned over its payout obligation to Principal. I now have several option for an annuity payout, including lump sum, 10 years certain, reduced monthly payouts with rights of survivorship for my spouse etc.
Im concerned about the tax implications of the various payouts— would I owe taxes on the entire lump sum if I take the payout that way? or since it was originally pension money can I roll it over into my current 401k? In addition to tax concerns, how would a lump sum payout affect my Medicare premiums?
I am age 70 and retiring next month.
Terry Says
Aha, here’s where you need a fee-only financial planner to evaluate your situation.
https://www.terrysavage.com/pam-krueger-wealthramp/
But here are some of the basic questions:
1. Ask Principal if you are eligible to roll over the lump sum (if you take it) into an IRA (not a new employer plan). If you can do the rollover, and don’t need the immediate cash, that will give you more flexibility in the long run. But if it goes into an IRA, there will be RMDs to take in a few years.
2. Yes, you will owe taxes on any payouts of this money. It will be added to your ordinary income, and depending on your total income could impact your Medicare Part B and Part D premiums through the IRMAA surcharge. Here’s a link to those brackets in 2025:
https://www.kiplinger.com/retirement/medicare/medicare-premiums-2025-irmaa-for-parts-b-and-d
And there’s not much you can do about that if you’re forced to take the benefits. But taking them in one year might allow you to reduce the IRMAA surcharge after it lands in two years.
You mention that you are retiring next year, and presumably will have lower income. That might be the best time to take the lump sum — assuming you can postpone. Then you could stay below the IRMAA limits.
3. As to benefits for your spouse, a lot depends on what income she would have if you pass sooner than expected. It’s something to consider.
Again, I urge a fee-only FIDUCIARY advisor to assist you in this decision, which would be based on a review of your entire financial situation.
