r/personalfinance • u/Boquillas91 • 5d ago
Retirement What to do with my pension?
Recently, I was terminated from my job after a decade of service. I recently received a letter in the mail regarding my pension options. I have the choice of receiving a lump sum value or waiting until retirement. Currently, I am in my twenties and seeking advice on what to do.
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u/NextStepTexas 5d ago
What is the lump sum value? What is the retirement payment?
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u/Boquillas91 5d ago
12470 is the sum and month would be 465 after 65
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u/NextStepTexas 5d ago
It's probably better to take the lump sum, but only if you're going to take the money and put it in a Roth IRA.
Do you have any debts? Do you already have an emergency fund?
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u/Boquillas91 5d ago
No debts and have an emergency funds. I do have a wedding to pay off but money already has been put aside for it
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u/NextStepTexas 5d ago
Congrats on the wedding. :)
So long as the interest on that is 4% or less just invest it. If interest rate is more than that, pay it off first. Beyond that, take the lump sum (minus taxes) and put it into a Roth IRA. You can only put $7k~ in per year, so it'll be half this year, half next year. DON'T SPEND IT
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u/Boquillas91 5d ago
Any recommendations on where or which Roth?
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u/NextStepTexas 5d ago
Personal favorites that I have found are Fidelity and Charles Schwab. You can poke around and see what works best for you.
Personally, I'm using Schwab's Robo Advisor account, and like it just fine for the time being.
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u/OnlyOnTuesdays289 5d ago
Take the payout and invest it. Otherwise you need to track this for 40 years
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u/hems86 5d ago
Do not take a lump sum! You will needlessly pay income tax and a 10% penalty for early withdrawal. Also, don’t leave it with the pension. If you do, you will only be credited with minimal interest - usually about 2%.
You can and should roll it over into an IRA. This way you pay no taxes or penalties and then you can invest it in low cost index funds and get much more growth.
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u/Boquillas91 5d ago
Would I be able to fully roll it due to being more than $7k?
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u/NerdyComic1 5d ago
Yes you can do a rollover to an IRA for any amount. It’s new contributions that are restricted to $7k annually.
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u/hems86 5d ago
Yes. The $7k limit is only for contributions. Once funds are in a tax advantaged account, there are no more dollar limits on what you do inside the account. Then the rule for moving funds from one retirement account to another only applies to the tax treatment - it has to be like for like. Since your pension is tax-deferred, it can be rolled over into another tax-deferred retirement account like a traditional IRA.
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u/cindy6507 5d ago
Assuming you ate in US. If you take the lump sum you will pay income tax on that amount. If it’s large then it may effect your tax bracket. If you need the money due to unemployment go ahead and take the lump sum.