Choosing Your Retirement Benefit Distribution

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Many people rely on pension funds from their employers to provide income during retirement. Consider carefully how you want your benefits to be paid out. The distribution methods you select may impact your family for years to come.

Annuity or Lump Sum?

Most retirement plans let you choose between an annuity and a lump sum distribution. The annuity will provide monthly income for the rest of your life. Many plans allow you to include your spouse as well, although payments will be lower.

The lump sum option pays you the entire distribution, less any withholding. You receive the money as a single payment, thereby allowing you to reinvest or spend the money as you see fit. You can also roll over all or a portion of the distribution in an IRA.

A lump sum distribution lets you choose where and how to invest your funds. The annuity option gives you security, but you have no control over your money. If you are looking for a monthly income stream but want to maintain more control, you can roll over the lump sum to an IRA and customize the amount of income you receive.

Before you make that decision, you'll also want to consider the tax consequences. An IRA is taxed as regular income when you receive payments. With a lump sum distribution, you have several different options for tax treatment. You can defer taxes. You can also apply five-year averaging, ten-year averaging or capital gains treatment. If you qualify for these methods, you may still be able to lower your tax liability.

For more retirement planning and investment advice, e-mail a Provident Financial Consultant* or call (650) 508-7222 or (800) 656-4096. Provident offers a full range of Investment and Retirement Planning services.