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I've Employer Defined Benefit Plan & eligble for retirement at age 55. Lump sum distr. is option but how w/o tax impact?

I can retire from my company at 55, currently I'm 56, and we have the option to takek our Pension as lump sum distribution. I want to retire now but how do I convert the lump-sum defined benefit distribution amount into another type of investment that will allow me to take yearly or monthly disctribution without incurring any tax penalty for early withdrawal. I do understand I will be responsible for taxes on any withdrawal. Thanks so much! Kathy

Dec 09, 2015 by Kathy in  |  Flag
3 Answers  |  4 Followers
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Peter C. Karp Level 20


I agree with the other advisors in that you can rollover your distribution to an IRA or to another employer qualified plan to avoid the early withdrawal penalty of 10%. Once you reach age 59 ½ the early withdrawal penalty of 10% would not apply but you would be subject to taxes on any withdrawals. You should consult with a tax professional to determine the best options for you and your specific situation. Unfortunately, until you reach 59 ½ you will be subject to the 10% early withdrawal penalty on any distributions.

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Comment   |  Flag   |  Dec 14, 2015 from San Francisco, CA

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Chris Schiffer Level 14

Kathy, Since your employer allows the option to take a lump sum distribution, you can do so. You will be taxed on a payment from the Plan if you do not roll it over and since you are under age 59½ you will also have to pay a 10% additional income tax on early distributions.

However, you may rollover the distribution to an IRA or an employer plan (a tax-qualified plan, section 403(b) plan, or governmental section 457(b) plan) that will accept the rollover. By doing so, you will not have to pay tax until you receive payments later and the 10% additional income tax will not apply if those payments are made after you are age 59½.

There are two ways to do a rollover. You can do either a direct rollover or a 60-day rollover.

If you do a direct rollover, the Plan will make the payment directly to your IRA or an employer plan. You should contact the IRA sponsor or the administrator of the employer plan for information on how to do a direct rollover.

If you do not do a direct rollover, you may still do a rollover by making a deposit into an IRA or eligible employer plan that will accept it. You will have 60 days after you receive the payment to make the deposit. If you do not do a direct rollover, the Plan is required to withhold 20% of the payment for federal income taxes.

If you do not roll over the entire amount of the payment, the portion not rolled over will be taxed and will be subject to the 10% additional income tax on early distributions if you are under age 59½.

I suggest that you contact me or an Advisor of your choice on Brightscope that can help you get the IRA set up coordinate the distribution with your employer and the custodian of your new IRA, and walk you through investment options that are right for you. In addition, some Advisors will also perform financial planning including retirement cash flow projections. I suggest looking for an Advisor that will work in a Fiduciary capacity. This means that they are not selling financial products. A Fiduciary is obligated to work in your best interests and disclose potential conflicts of interests.

3 Comments   |  Flag   |  Dec 09, 2015 from BASKING RIDGE, NJ

Thanks Chris for you reply, I really appreciate it. Bummer I can't take withdrawal from lump sum before 59.5 without incurring penalty

Flag |  Dec 10, 2015
Chris Schiffer

You can. Give me a call and I will explain.

Flag |  Dec 10, 2015 near BASKING RIDGE, NJ
Chris Schiffer


Flag |  Dec 10, 2015 near BASKING RIDGE, NJ

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0 votes
Davin J Carey Level 1

Hi Kathy,

While Chris is correct that you could roll over your DB plan into an IRA or other type of qualified plan and NORMALLY be subject to penalties for distributions pre 59 1/2, there are also some rarely used tricks in the IRS code that I think may be of help to you.

I'd be eager to look more deeply into your situation before giving you a path to pursue as there are probably other investment and tax-related issues we should dig into.

If you are interested in looking into some of those options, please reach out to me and we can dig into your situation, free of charge.

Congratulations (on early retirement) & Happy Holidays!

3 Comments   |  Flag   |  Dec 09, 2015 from Ventura, CA

Hi Davin - thanks for your reply I'm not retired yet as I'm trying to figure out how to access some of the money from lump sum without tax penalty. My husband and I do have real estate investments and have heard about putting retirement money in real estate associated account but not sure how exactly this works and if it'd be a good idea. As I dig in further, I will likely reach out to you via email.

Flag |  Dec 10, 2015
Davin J Carey

Hi Kathy - sounds good. Looking forward to connecting. My email is Davin.Carey@TaxWealthPlan.com and email is 805-644-0697.

Flag |  Dec 10, 2015 near Ventura, CA
Davin J Carey

Hopefully we CAN get you retired soon =)

Flag |  Dec 10, 2015 near Ventura, CA

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