Connect with us


How Can I Avoid Taxes on Lump Sum Retirement Pension Payouts?

News Agencies



SmartAsset: How to Avoid Taxes on Lump Sum Pension Payout

SmartAsset: How to Avoid Taxes on Lump Sum Pension Payout

When your pension matures, there are multiple distribution options that you can choose from. Unfortunately, many of these distribution methods result in a tax liability that reduces your payout. However, you can avoid taxes on a lump sum by rolling it over into an individual retirement account (IRA) or another eligible retirement plan. Here’s how to make it happen.

A financial advisor can help you lower your taxes by optimizing your investments with a tax plan.

Pension Payout Distribution Options


Retirees have multiple distribution options when receiving a pension. These are four common choices that retirees make:

  • Single-life. Monthly payments are based on the life of the person receiving the payout.

  • Joint and survivor. Payments continue until both spouses pass away. The surviving spouse may receive the full distribution or a fraction of it, depending on the pension plan.

  • Life with period certain. The retiree receives lifetime income, but payments are also guaranteed for a minimum period of time in case the retiree dies quickly.

  • Lump sum payout. Instead of receiving a monthly income, the retiree receives a lump sum that he or she can invest in a separate account.

Tax Treatment of Pension Distributions

The Internal Revenue Service (IRS) classifies pension distributions as ordinary income. This means that they are taxed at the highest income tax rates.


Because pension distribution taxes can be so high, investors wisely seek out ways to reduce taxes on this income.

When a retiree receives a lump sum pension payout, not only is this ordinary income, but the payout could push their income into a higher tax bracket. Depending on the size of the pension payout, it could also trigger additional investment taxes on other sources of income. Additionally, it could reduce their eligibility for other tax deductions and benefits.

Why Investors Choose a Lump Sum Pension Distribution

SmartAsset: How to Avoid Taxes on Lump Sum Pension Payout

SmartAsset: How to Avoid Taxes on Lump Sum Pension Payout

While many investors prefer the regular payments that a pension provides, it isn’t always the best decision. Some investors choose to receive a lump sum distribution instead. Here are five common reasons why:

  • More control over their money. When you take a lump sum, you can make investment and distribution decisions that a pension does not offer.

  • Ability to leave money to beneficiaries. With a lump sum, you can withdraw money to cover your retirement income needs and leave whatever is left to your beneficiaries.

  • Fear that pension will collapse. Many pensions collapse under financial obligations owed to retirees. When this happens, the government steps in to cover pensioners, but the payouts are often reduced.

  • Can shop annuity rates. When you receive a lump sum, you can still create monthly recurring income through an annuity. Instead of settling for the pension payout rates, you can shop your lump sum around to find the best rates and terms.

  • Roth conversion option. With your lump sum payout in a Traditional IRA, you can convert all or some of the money into a Roth IRA. While you may pay taxes on the conversion, all future earnings and withdrawals are tax-free.

How to Avoid Taxes on a Lump Sum Pension Payout


Investors can avoid taxes on a lump sum pension payout by rolling over the proceeds into an individual retirement account (IRA) or other eligible retirement accounts. Here are two things you need to know:

20% withholding. Even if you plan on rolling over your pension payout, some companies withhold 20% for potential federal tax liabilities. This occurs when the pension company sends you a check for your pension payout.

When that happens, you only receive 80% of your lump-sum distribution. If you want the full amount of your lump sum pension invested in your retirement account, you’ll need to come up with the other 20% yourself. For investors who are able to do so, the 20% that was withheld is returned when you file your taxes.


Direct rollover option. To avoid this, do not receive the payout directly. Instead, perform a direct rollover by requesting that the money be sent directly to your retirement account at the new investment company.

This process can be tricky for some investors, so the best approach is to work with your financial advisor to complete the paperwork.

Bottom Line

SmartAsset: How to Avoid Taxes on Lump Sum Pension Payout

SmartAsset: How to Avoid Taxes on Lump Sum Pension Payout

Many investors choose to receive a lump sum distribution from their pension to have more control over their money, leave an inheritance or to alleviate fears of the pension running out of money. Receiving a lump sum distribution could trigger a large tax bill. To avoid this situation, consider a direct rollover of your lump sum pension distribution to an IRA or another retirement account.

Tips for Creating Retirement Income

  • Pensions and annuities provide regular income that retirees can depend on. Other investments supplement these payments and grow your portfolio to offset the effects of inflation. SmartAsset’s retirement income calculator can help you determine how much you need to save for retirement.

  • Investors work with financial advisors to create financial plans for their investment needs and goals. These customized plans factor in your current nest egg, savings rate, risk tolerance and more. Finding a qualified financial advisor doesn’t have to be hard.  SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©, ©, ©


The post How to Avoid Taxes on Lump Sum Pension Payout appeared first on SmartAsset Blog.

The latest news from the News Agencies

Continue Reading


Breaking News

Editor Pick’s

Latest Entertainment

Entertainment10 hours ago

Simu Liu, Lisa Ling, and more celebrities condemn Lunar New Year mass shooting in California

SOUL OF A NATION – 5/27/22 – ABC News groundbreaking Soul of a Nation returns with a special presentation, Together...

Entertainment11 hours ago

Travis Barker Debuts New Tattoo That Appears to Be of Kourtney Kardashian’s Eyes: ‘Oh Hey There’ Travis Barker/Instagram Travis Barker/Instagram Kourtney Kardashian is keeping her eyes on Travis Barker…forever. The Blink-182 drummer, 47, revealed a...

Entertainment12 hours ago

Pamela Anderson says Tommy Lee ‘lost it’ after she filmed kiss with ‘Baywatch’ co-star David Chokachi

Pamela Anderson is looking back on the havoc her relationship with then-husband Tommy Lee caused on the set of Baywatch....

Entertainment12 hours ago

Riley Keough, Lisa Marie Presley’s daughter, welcomed a daughter last year

Riley Keough welcomed a baby girl in 2022. (Photo: REUTERS/David Swanson) Riley Keough and her husband Ben Smith-Petersen welcomed a...

Entertainment14 hours ago

Anne Hathaway wanted to make Eileen as a reaction to a creepy question she got as a teenager

Anne Hathaway Director William Oldroyd’s Eileen just premiered last night at the Sundance Film Festival, and Anne Hathaway—who leads the film...

Entertainment14 hours ago

Lisa Marie Presley celebrated by Sarah Ferguson, Axl Rose, Austin Butler and more at Graceland memorial

Billy Corgan performs at the memorial service for Lisa Marie Presley at her Graceland memorial service on Sunday morning. (Photo:...

Entertainment15 hours ago

‘Avatar’ marks 6 straight weeks at No. 1, crosses $2 Billion

NEW YORK (AP) — James Cameron’s “Avatar: The Way of Water” led ticket sales in movie theaters for the sixth...

Entertainment15 hours ago

JoJo Siwa marks 2 years since she came out as gay: ‘I’m so proud of 17-year-old JoJo’

JoJo Siwa is marking two years since she came out. (Photo: Matt Winkelmeyer/Getty Images) JoJo Siwa is celebrating the second...


Latest Sports

Sports52 mins ago

Eagles’ quick reinvention between Super Bowl contenders is remarkable. Just ask an All-Pro who was part of both

Not many Eagles are left from the team that won the Super Bowl in the 2017 season. Jason Kelce is....

Sports1 hour ago

NFL rumors: Brock Purdy has won 49ers’ 2023 QB battle over Trey Lance

Barring something unforeseen, Brock Purdy reportedly will be the 49ers' starting quarterback when the 2023 season opens.

Sports2 hours ago

Cowboys’ Pro Bowl RB Tony Pollard reportedly breaks fibula in playoff loss to 49ers

Pollard was fitted with an air cast before leaving the field.

Sports2 hours ago

Kyle Shanahan’s odd end-of-half strategy annoys fans, but helps 49ers win

Kyle Shanahan understands why fans were frustrated with his clock management to end the first half, but doubled down on...

Sports3 hours ago

Bettors kept taking the Chiefs, and Jaguars ruin all those bets with backdoor cover

Chiefs bettors were sick at the end of Saturday's game.

Sports3 hours ago

Justin Turner wanted to re-sign with Dodgers before the plan quickly changed

Justin Turner is excited to be part of the Boston Red Sox, but the former Dodgers third baseman always will...

Sports4 hours ago

Warriors’ Steve Kerr explains why it’s hard to play defense in NBA now

Warriors coach Steve Kerr explained the challenges of playing defense in the NBA right now.

Sports4 hours ago

An early look at the Eagles-49ers NFC Championship matchup

The Eagles and 49ers, the top two seeds in the NFC playoff bracket, will meet Sunday in Philadelphia for the...

Technology Hot News

Technology4 days ago

Led by "Amazon" and "Microsoft" .. the technology giants are planning to lay off 64,000 employees

After 10 years of driving the stock market bull run, big tech companies are racing to downsize staff to adapt...

Technology5 days ago

Apple introduces MacBooks with new M2 processors

Yesterday, Tuesday, Apple unveiled MacBooks powered by the new, faster “M2 Pro” and “M2 Max” processor chips, in a surprise...

Technology5 days ago

All you need to know about the upcoming Galaxy S23 phones from Samsung

Samsung has officially announced that the (Galaxy Unpacked 2023) event will be held this year on Wednesday, February 1, which...

Technology5 days ago

FTX Exchange Announces Hacking and Stolen $415 Million in Cryptocurrency

Bankrupt American cryptocurrency firm FTX announced today, Wednesday, that $415 million in cryptocurrency has been hacked and stolen from the...

Technology5 days ago

Because of a "fraudulent tweet"… Elon Musk's trial begins

Elon Musk's trial began Tuesday in San Francisco with the selection of jury members who will have to decide whether...

Technology5 days ago

An electric spoon replaces salt and spices, but with conditions

Experts have developed an electric spoon that is able to replace spices and flavors and affect the taste buds in...

Technology1 week ago

The biggest dangers of using tracking devices.. so you can escape?

If you spot an unknown Bluetooth tagging device, there are ways to disable the device so it can't track your...

Technology1 week ago

New Twitter.. For You tab to web version

The Twitter platform announced that it will bring the new tab (For You), which launched last Tuesday for iPhones and...