To take the Lump Sum Pension distribution or not??

Question

Good morning BP!!

I've got something that has been eating at me for a few months now and I'm not sure how to proceed. I'm not sure who to talk to about this so I thought I would throw it out here first to get some opinions.

I have a pension with a former employer and they sent me a letter back in October about the possibility of taking a lump sum distribution (just north of $300k) or I could continue to leave it where it is and take the monthly payment whenever I decide to start (I'm 52 so it would be a while yet).

I have been investing in real estate for a few years now and have done quite a bit of private lending, out of my self-directed IRA, with good results. There are times (especially recently) that I wish I had more funds in the IRA to put to use because I'm sure I could make it grow faster than where it is now.

My ultimate goal is to have enough rental properties, multi-family ideally, to create enough passive income to live off of and retire as soon as possible. I'm sure that is limited if I were to do it inside the IRA but due to the lack of funds outside the IRA that's my best option at the present time (I believe?)

So, should I take the lump sum and roll it over into my SDIRA or leave it where it is and try another avenue to purchase more rental properties? What would you do?

Thanks in advance for your input and I'm sure I have left out some pertinent information but I thought I would at least get the ball rolling!

Have a great day!!

Charles Campbell · Answer

I had the same decision last year and took the lump sum and rolled into my SDIRA. I started investing in performing notes and my returns are significantly better than the pension payout. I also evaluated buying an annuity, which was better than the pension based on my criteria, but note income is much better than either the pension or the annuity. Of course, part of the note income stream is return of capital, and there are expenses with an SDIRA, so you need to consider those elements as well.

Everyone's situation is different, but the lump sum was an easy decision for me.

Jay Kaltenbach · Answer

@Steve Vaughan thanks for the input. Good point about the employer risk and them going out of business....I have some cousins who were in the automotive industry several years back and ended up with nothing after that fiasco.

@Charles Campbell I too have thought about note investing but will have to do some more research on the topic. I just think there are so many other options available, that can beat the pension payout, that make it hard to justify not taking the lump sum.....we'll see how it goes.

@George Blower Good points!! I hope I make it to 70 1/2!! I'd rather have it in a Roth IRA but I don't think I can afford the taxes if I roll it into that?

George Blower · Answer

@Jay Kaltenbach

By transferring the pension to an IRA you could continue to invest in equities in addition to being able to to invest in real estate. Obviously, because the pension is considered retirement funds, it will be taxable when you start taking distributions which will also be the case if you transfer it to an IRA and start making distributions. However, by transferring it to an IRA, you can at least delay making distributions until you reach age 70 1/2.

Steve Vaughan · Answer

In general, whether you decide to put into an SDIRA or regular IRA, a lump-sum payout is usually always the correct answer.

They normally assume a 7% growth rate which can be beat pretty easily. There is also employer risk. If they go out of business, you are toast. There is also life risk. When you die, the pension stops.

I'd take the money and roll it to an IRA, self-directed or not @Jay Kaltenbach.

Jay Kaltenbach · Answer

@Chris Seveney.....Thanks Chris I appreciate the input....I'm definitely leaning toward taking the lump sum....I would hate to miss out on an opportunity because I didn't have funds available.

@Michelle B...... Thanks!! I'd like to talk more if you wouldn't mind?

To take the Lump Sum Pension distribution or not??

To take the Lump Sum Pension distribution or not??

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