Expert: Allen - 5/26/2010

Question
Hello,

My husband passed away on 1/6/10, and I am the beneficiary of his pension.  The amount of the pension is $277,469.56, and his employer informed me that I have two options.  I could get the monthly annuity, which will be $1,567.65, or I could take the payout in a lump sum.  I would like to take the lump sum, because it will allow me to help my daughter , who is starting college, pay off several debts, and maybe invest a little, but I do not know what type of account would be best, for the rollover, to avoid that huge tax bite.  If I am not mistaken, I think that his employer informed me that because I am 50 years old, there will probably be a penalty for that.  My husband has been deceased for a little over four months, and I still can’t get my head together, and I hope that you can offer me some advice, because I am very confused, and I don’t want to make a foolish mistake.  I will sincerely appreciate any suggestions you can offer.  

Thank you,

Answer
Sorry to read about your situation. Unfortunately, I can't give you a good answer to your question. I can, however, point out a few things:

1. You will have to pay federal and state income tax on any money you receive in cash. However, the extra 10% excise tax penalty that normally applies to distributions received before age 59 1/2 does not apply. There is an exception for death benefit payments.

2. One qualification to the statement in 1. If you take the distribution in cash or in monthly payments there is no penalty tax. As stated above you do pay regular income tax when you receive the money. However, if you rollover the lump sum to an IRA, no income tax is due until you take money from the IRA. In addition, the 10% penalty will apply to any money taken from the IRA before 59 1/2.

3. $1,567.65 per month is a reasonable payment from the lump sum. You have to decide if you want the money now and in regular payments or if you would prefer for the money to accumulate and take at a later date. If you opt for the lump sum, rollover to an IRA makes sense if you don't have to touch the money until you reach 59 1/2.

4. Having lost my own spouse, I know that the first few months can be very difficult. Therefore if you can, delay the decision for awhile. In addition, hopefully a friend can recommend an honest investmment advisor to help you. However, be careful and make certain you get good recommendations before you turn your money over to someone.

I hope I haven't added to your confusion. Good luck and I can tell you from my own experience, things do get better over time.