Will you receive a pension payment when you retire? If so, you’re one of a fortunate few. Defined Benefit Pensions are quickly disappearing from employer benefit menus. In 1998, 58 percent of Fortune 500 companies offered defined benefit pensions, also known as “pensions”. By 2015 that figure was down to 20 percent.1
Many employers have eliminated their defined benefit plan in favor of defined contribution plans, such as the 401(k). In a pension, the employer funds the plan and is responsible for providing plan participants with retirement benefits. In a 401(k) and similar defined contribution plans, the employer may make some contributions, but the funding responsibility largely lies with the employee.
Pensions are helpful in retirement because they provide a guaranteed, predictable source of lifetime income. Even if you haven’t put much money away for retirement, you can still count on your reliable pension income after you leave the working world.
There may be some elements of your pension benefit that require advanced planning. Below are a few questions to ask yourself about your pension. By answering these questions, you can make informed decisions and better plan for your retirement.
What are the different payment options?
Your payment amount will depend on a few pieces of criteria, including your career earnings with the employer and your payment option selection. Your employer’s human resources department should be able to give you an overview of your options and an estimate of your payment.
Most plans offer several different payment terms. For instance, you might select to receive your payment throughout your lifetime. You also may have the option to select a payment that lasts for your lifetime and your spouse’s. Generally, if you choose an income option that will continue for a beneficiary after you pass away, your benefit amount will be lower than it would have been if it lasted only for your lifetime.
Will your benefits count as taxable income?
Most pension plans are funded with pretax dollars. Pension plans usually are also tax-deferred, which means growth in the plan isn’t taxed as long as the funds stay in the account. These funds can’t avoid taxation forever, though. That’s why most pension benefits are treated as taxable income.
If your pension funds haven’t yet been taxed, your payments will likely count as taxable income. It’s important to understand what your tax exposure may be so you can budget accordingly. A financial professional can help you map out your pension and all other taxable income so you can create a tax strategy.
Can you take your payment in one lump sum?
Many pension plans offer a lump-sum distribution option. In this option, you are paid a discounted lump-sum amount instead of lifetime payments. Of course, if you take the lump sum as one distribution, you may face a substantial tax liability.
Instead, consider rolling the lump-sum amount from the pension into an IRA. That would allow you to invest the funds based on your specific needs, goals and risk tolerance. You could also better control distributions and manage your tax exposure.
Ready to develop your pension benefit strategy? Let’s talk about it. Contact us today at DSM Financial. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.
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