Pension Plan Benefits: Advising Your Client

Many qualified retirement plans provide the employee-participant with a choice, on separation, of receiving the plan benefits in a form of life annuity or in a lump-sum distribution (LSD). The use of the LSD option has become increasingly popular, due to current inflation and high interest rates. A...

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Bibliographic Details
Published in:Journal of accountancy 1983-11, Vol.156 (5), p.117
Main Authors: Goodman, Leonard, Rier, Stanley, Lipka, Roland
Format: Magazinearticle
Language:English
Subjects:
Averaging
Distribution
Lump sum
Retirees
Retirement
Retirement benefits
Roll over
Tax planning
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Summary:Many qualified retirement plans provide the employee-participant with a choice, on separation, of receiving the plan benefits in a form of life annuity or in a lump-sum distribution (LSD). The use of the LSD option has become increasingly popular, due to current inflation and high interest rates. A decision must be made within 60 days of receipt of the LSD between rollover into an individual retirement account (IRA) or the payment of a current tax using a 10-year forward averaging. This analysis uses 2 models to determine which choice, rollover or forward averaging, will provide the maximum net terminal wealth available. The 2 models, a 100% bequest model and a 100% consumption model, involve retirees at age 65 and 70 who had LSDs of $25,000 to $500,000 and taxable income before (TIB) the LSD of $1,000 to $50,000. The analysis indicates that it is better to rollover the LSD in almost every case. However, for retirement at age 70, bequeathers with TIBs of $20,000 or more and LSDs of $300,000 or less, at 8%, 10%, or 12% rates of return, are better off forward averaging.
ISSN:0021-8448
1945-0729