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Old 03-17-2015, 12:31 PM
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Pension Lump-sum cashout

My mother received the offer to cash-out her pension. She asked me for advice. She is 79 years old. We are trying to figure out which is the better deal.

She currently receives $450 per month. This would terminate on her death. The lump-sum would be $45000.

I figured in the simplest case, no-interest. That the breakeven point is 8 years (e.g. the 45000 divided by $450).

But I am not sure about the tax effects.

She currently has $15000 in SSA benefits. $3000 in part-time wages. $5400 in pension payments. $2000 in IRA required distributions. For a total taxable income of about $10500, with none of her SSA being taxable.

I reran her taxes (2014) (ignoring state taxes) as if she took the pension lump (and removed the pension monthly payments) just to see the tax effects. Her total taxes due went from about $0 to $7500. And $12700 of her SSA became taxable. (her tax rate went from 0% to 13.2%).

So it looks like the after-tax lump sum goes from $45000 to $37500 (after subtracting $7500).

Did I compute this correctly?

Are there any other strategies to avoid giving the taxman any more than necessary? She has a traditional IRA, could she roll then money into there and then take out payments to keep her SSA from becoming taxable?

Another question not pertaining to the lumpsum question, since she is effectively tax at $0 currently, should she be taking money out of her traditional IRA up to some AGI threshold, because she is essentially getting it tax free.



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Old 03-18-2015, 01:03 AM
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She currently receives $450 per month. This would terminate on her death. The lump-sum would be $45000. I figured in the simplest case, no-interest. That the breakeven point is 8 years (e.g. the 45000 divided by $450)====>>>>>>>>>>>>>>.You also need to critically consider timer value money concept since money available at the present time is worth more than the same amount in the future due to its potential earning capacity.i eman for example the future value of $45k in 8 years is $52,725 with the interest rate of 2% for the next eight years.

But I am not sure about the tax effects.

She currently has $15000 in SSA benefits. $3000 in part-time wages. $5400 in pension payments. $2000 in IRA required distributions. For a total taxable income of about $10500, with none of her SSA being taxable. ===.her gross income is $17,900;$7500+$3,000+$5,400+$2K.

I reran her taxes (2014) (ignoring state taxes) as if she took the pension lump (and removed the pension monthly payments) just to see the tax effects. Her total taxes due went from about $0 to $7500. And $12700 of her SSA became taxable. (her tax rate went from 0% to 13.2%).======>>>>>>not 12,700 but 12,750(85%*$15,000);if I assume the whole of $45k is taxable distribution is taxable; then her magi is $62,900, and as single her tax liability is (her agi is$68,150 and her taxable income is $58K if she takes her standard deduction) 10,356 an d marginal tax rate is 17% and effective rate is 16% I guess.

generally, a lump-sum distribution is one in which the entire balance of your retirement account is distributed to you (or your beneficiaries). This distribution must be given to you in a single taxable year; Taking a lump sump distribution may trigger a significant tax liability unless the retiree places the funds in another qualified retirement plan. Employer contributions entirely fund most pensions, creating fully taxable payouts. Any after-tax employee contributions, such as those that many government-sponsored pensions may require, create no taxes when distributed. When you begin taking payments, the plan administrator computes the tax-free portion of each monthly payment and that portion stays constant for the life of the payouts, even if the payments increase. Administrators calculate the taxable amounts . For lump sum distributions, the taxable amount is the amount of the distribution minus the total amount that the employee contributed to the plan.



So it looks like the after-tax lump sum goes from $45000 to $37500 (after subtracting $7500).========>>>>>>almost ;correct



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