Expert: Allen - 3/8/2010

Question
Hi,
I have received notice that my former employer of  7 years is terminating their defined pension plan in which I am 100% vested. It was frozen in 2004 %26 after approval of a standard termination in August of this year by the IRS I am to receive a lump sum (the only option available). I am 50 years old. My pension plan account states that at an early retirement age of 55 I would receive either $193/mo or the option of a lump sum of $16,000. At the retirement age of 65 the lump sum would be $27,000. My question is what is the lump sum amount I will receive? The entire $16,000? Or would it be reduced since I am only 50 years old? Also would I have to pay both a 10% and 20% early withdrawal penalty even though I am being forced to take the lump sum now? Any information on this matter would be greatly appreciated. Thank you very much, Lana

Answer
I believe you have to be offered a choice of an immediate pension, a deferred pension with payments beginning at the normal retirement date and an immediate lump sum. The lump sum would be the theoretical value of the deferred pension. If you take the lump sum you can tell the administrator of the pension plan to send the money to an IRA. If you do this no taxes are due at this time. Taxes would be paid when you withdraw the money from the IRA. The 10% penalty would only apply if you withdrew it before you reach age 59 and 6 months. No penalty is paid on the rollover to the IRA.

If the amount of the lump sum at age 55 is $16,000, then the amount that would be paid at age 50 is $11,000-$12,000. However, the numbers you quoted don't seem correct. A pension of $193 beginning at age 55 is worth considerably more than $16,000. It's probably closer to $27,000 then $16,000. Therefore the lump sum at age 50 may really be $16,000. Check the notice and write again if you still have questions.