3 Questions to Ask About Your Pension Benefit
Filed under: Employer Plans
Will you benefit from a pension payment in retirement? If so, consider yourself fortunate. Pensions are quickly disappearing from employer benefit menus. In 1998, 58 percent of Fortune 500 companies offered pensions, also known as defined benefit plans. By 2015 that figure was down to 20 percent.1
Employers are shifting away from defined benefit plans like pensions 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 so helpful because they provide you with a guaranteed source of retirement income. Even if you haven’t put much money away for retirement, you can still count on a steady, reliable source of income after you leave the working world.
While a pension is a valuable benefit, there are some items related to your payment that you may need to plan for. Below are a few questions to ask yourself about your pension benefit. By answering these questions, you can better prepare yourself and enter retirement with confidence.
What are your pension payment options?
You can’t plan your pension income if you don’t know how much you will receive. Your payment amount is likely dependent on a few criteria, including your career earnings with the employer and your payment option selection. Fortunately, your employer’s benefits or human resources department should be able to provide an estimated benefit amount.
Your plan likely offers a few different payment options, and your choice could impact your benefit amount. For instance, you might select to receive your payment as long as you live. However, you could also 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.
How will your pension payments be taxed?
Most pension plans are funded with dollars that have not been taxed. Pension plans usually are also tax-deferred, which means the funds grow inside the plan without facing taxes. 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 a 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 Ambrose Financial & Insurance Services. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.
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