Pension and 401(k) Distribution Options
Pensions and 401(k)s are employer sponsored retirement saving accounts with clear differences. 401(k)s are participant-directed, defined-contribution plans where employees choose investments and bear the investment risk. Pensions are employer-funded defined-benefit plans that offer guaranteed lifetime income based on salary and years of service. Pension plans shift investment risk to the employer.
Pension distribution options typically include choosing between guaranteed, lifetime payments or payments for a specific period (e.g. 5 or 10 years), and a one-time lump-sum payment. One of the reasons someone would want to take a lumpsum is to transfer/rollover funds into a better performing income producing annuity with a higher projected guaranteed lifetime income. Another reason for taking a lump-sum payment would be to integrate funds into a long-term income producing strategy (e.g. the “bucket approach”).
401(k) withdrawal options include taking a lump-sum distribution, setting up systematic partial withdrawals, or rolling over funds into an IRA. 401(k) can be rolled over to an annuity for guaranteed income. If you are in pre-retirement stage, you might want to check if your employer’s 401(k) plan offers “non-hardship in-service withdrawals”. Not all 401(k) plans offer this feature. Typically, at age 59 ½ or older, employees can withdraw vested funds from their 401k accounts and roll them into IRAs while they still employed. In preparation for your retirement, you may want to consider transferring your 401(k) funds into an income producing annuity or consolidate funds with already existing IRA. This will help you simplify management and implement a long-term income generation strategy more effectively. Consult your advisor before taking any action.
Pensions are generally taxed as ordinary income at the federal level when received, as they are usually funded with pre-tax dollars. Because contributions to 401(k) can be made before taxes (traditional 401(k)) or after taxes (Roth 401(k)), withdrawals are taxed as ordinary income (traditional 401(k)) or are tax-free (qualified Roth 401(k) withdrawals).
Taking an income from your retirement account and choosing an income producing strategy that is appropriate for you are important decisions. You need to make choices that are in your best interest. Get professional help. Book a free initial consultation .