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FAQ: Pension Distribution

September 30, 2020
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Frequently Asked Question: I took a distribution from my pension plan and I am not sure I made the right choice …. What can I do now?

Do you have questions on the decision you made to withdraw the lump sum benefit from your pension plan or did not fully understand the options you had available?  For those who recently received distributions from the Newmont Legacy for Placer Dome Pension Plans, you have a limited amount of time to make a change on what you decided to do with the funds.

Taking a total distribution can have a huge impact on your taxes owed. If the distribution was large, you could be paying tax at a higher tax bracket when you go to file for 2020. In addition, if you could be faced with the 10% penalty which also increases what you will owe the IRS. If you did not have enough withheld at the time of the distribution and a pre-payment made, you could be facing a large tax bill.

If you were seeking control of the funds and did not realize that you would have to pay tax on all of the funds at once, you have time to roll the funds into your Individual Retirement Account (IRA) as long as the funds are deposited within 60 days of the date of distribution.

Example: Bob is married and 57 years old

He had $275,000 available in his Newmont Pension

Bob had all the funds distributed to his joint bank account

Funds were distributed from the plan on August 1st

Bob and his wife make an annual income from earnings of approximately $150,000

With the distribution from the pension, their total Adjusted income for 2020 has now increased to $425,000 increasing their marginal tax rate from 22% to 35%. In addition, Bob is under 59 ½ so he is subject to the 10% early withdrawal penalty.

Bob was unaware at the time he made his election that he was increasing his tax rate so much and now wants to look at other options. Can he do anything to avoid paying the extra tax and penalty? 

Good news! Bob can still roll the funds into an IRA and avoid the additional penalty and tax on his income and the distribution for 2020 if the funds are deposited into a qualified IRA account before September 29th.

This is a hypothetical situation based on factual cases.

Frequently Asked Questions about Pension Distributions:

  • When is it too late to change my mind about taking the distribution?

It depends on your situation. For most you have 60 days from the date of the distribution. The sooner you act the better. If you have concerns talk to an advisor to discuss all your options.

  • Is there any way to avoid paying tax and take the distribution?

The distribution of the funds from a pension account are tax deferred. Once they are distributed, taxes need to be paid. Proper and strategic planning can make a big difference in the amount of tax you will pay based on the timing of your distribution(s).

  • What is the purpose of the funds?

The funds were in a pension set up to provide guaranteed income for life at retirement for the employee (and in some cases their spouse). Is that still the intent? There are multiple ways to invest in an IRA account to keep the funds in a deferred account until you (and your advisor) decide to draw the funds at the most opportune time and opportune method for your situation. There are a myriad of investment options available, the key is to find the right one that offers the features you need and want for your planning needs. A retirement income specialist can help guide you through the sea of options to the product that best meets your needs. Some features potentially available are guaranteed growth rates, death benefits, accelerated living benefits, guaranteed lifetime income benefits, and bonuses on purchases or benefits.

  • Who can I talk to if I have changed my mind?

Talk to a financial advisor to discover your options based on your specific situation.

  • Who can I talk to if I have not changed my mind and I want to make sure I have pre-paid enough tax on the distribution I took?

Call a tax advisor such as a Certified Public Accountant (CPA) or Enrolled Agent (EA) who can review your most recent filing status and your estimated income for 2020 to help you estimate your liability and determine if you have planned well or need to set aside additional funds.

 

REMEMBER! Keep all documentation you received associated with the distribution or rollover you took for tax filing to ensure that the movement of your funds is reported correctly.

Please call and talk with us if you have any further questions or concerns that we can assist with. We work with a network of skilled professionals who can help.

We look forward to talking with you soon to guide you toward a better understanding of your benefits and options. Innovative Advisors can be reached by phone or text at (775)753-4333.