23 Oct I’m retiring. How can I get my pension in a lump sum?

Q. I’m 74 and retiring at the end of this month with a pension from my employer and still being covered by life insurance. How can I find out about getting a lump sum pension so I can get my money now?
— Retiring soon

A. Congrats on your retirement.

Getting a lump sum, though, could have consequences you haven’t considered.

Arranging for a lump sum pension payout instead of receiving your pension on a yearly basis should merely require you speaking with either the Human Resources department of your employer or an outside third party pension administrator, said Neil Becourtney, a certified public accountant and tax director with Smolin, Lupin & Co. in Red Bank.

He said it’s important for you to consider the tax ramifications of such a decision.

“It is no different than the national lotteries — Mega Millions and Powerball — where one can choose a lump sum or an annuity,” he said.

If you receive your entire pension upfront, you will have to pay the entire tax up front for the year of receipt, Becourtney said.

“Nobody knows what the tax laws will be in future years,” he said. “Many states including New Jersey provide an annual pension exclusion, which you will lose out on if you take the entire pension distribution in a lump sum.”

Maybe you will decide to move to a low-tax or no-tax state such as Florida in the future, but if you take the entire distribution up front, you will pay full state income tax today, he said.

“General tax planning has a taxpayer look to defer income to future years as opposed to accelerating income into the current year,’ he said. “But if a taxpayer believes they will be in a lower tax bracket in the current year then accelerating income may be beneficial.”

We recommend you meet with someone who can help you plan for this big decision before you make a move.

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This story was originally published on Oct. 23, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.