Lump Sum payout of DB pension plan.

posted at 1/9/2013 2:01 PM EST

- keane5050
- Posts: 53
- First: 12/15/2010
- Last: 11/15/2013

I am 54 and due to a layoff I will be beginning my pension shortly. I have the option of taking my DB pension plan as a lump sum or an annuity. I also have the option of taking a percentage as a lump sum and the remainder as an annuity. The total lump sum value is approximately $450,000. I am thinking about taking 25% as a lump sum to pay off my mortgage and then taking the remaining 75% as a monthly income. I would like to know what the tax implication would be for this scenerio. Would there be an addition 10% tax penalty for taking the $112,500 as a lump sum or would it just be added to my income for the year?

Re: Lump Sum payout of DB pension plan.

posted at 1/10/2013 7:12 AM EST

In response to keane5050's comment:

[QUOTE]

I am 54 and due to a layoff I will be beginning my pension shortly. I have the option of taking my DB pension plan as a lump sum or an annuity. I also have the option of taking a percentage as a lump sum and the remainder as an annuity. The total lump sum value is approximately $450,000. I am thinking about taking 25% as a lump sum to pay off my mortgage and then taking the remaining 75% as a monthly income. I would like to know what the tax implication would be for this scenerio. Would there be an addition 10% tax penalty for taking the $112,500 as a lump sum or would it just be added to my income for the year?

Dear keane5050:

Since you have not reached age 59 and 1/2, the lump sum amount you propose to take as a distribution will be subject to both the early withdrawal penalty of 10% and tax at ordinary income tax rates. In addition, the monthly income amounts may also be subject to the 10% penalty. From the information provided, the only exception to the penalty that could be available to you would be a lifetime payout method that meets the IRS' criteria as such a method (paid on a monthly or other basis). You would need to check with a pension expert as to whether the lifetime amortization of the 75% porrtion would be considered a separate payout from the lump sum (I think this is the likely outcome) or whether they would be viewed together (a disaster, since all payments would be subject to the 10% early withdrawal penalty).

Hope this helps in preparing your return and planning for your future taxes!

Mark H. Misselbeck, C.P.A., M.S.T., Tax Principal

Katz, Nannis + Solomon, P.C.