How To Best Model Lump Sum Pension Distributions
What is the best way to model a lump sum distribution from a pension? I have two scenarios I would like to play with but am having trouble getting an acceptable model. One scenario, I can sort of "hack" but the other has me completely baffled.
Scenario 1: Take Pension as Lump Sum + Reduced Annuity
This one I tried modeling two ways. The first was to simply enter both amounts in the Pensions folder.
I entered both the lump sum amount and the annuity amount and ran the simulations. The problem with this approach is the lump sum appears to be automatically assumed to roll into your Regular Assets and thus is fully taxed at distribution resulting in a *huge* tax bill for the year of retirement.
Since I would prefer to rollover the lump sum to an IRA, I also modeled a variation of this scenario by entering only the annuity portion of the pension in the Pensions Folder and then added an IRA amount equal to the lump sum in the Retirement Accounts Folder. This method mostly worked but I ran into some limitations with the way ESP treats all retirement funds accounts as a single entity.
How and where can you specify that lump sum pension distributions be rolled over into IRA accounts?
Scenario 2: Defer my pension (Both Lump Sum and Reduced Annuity)
I am completely baffled in how to model this one. The idea is that I would look at retiring early and living on my regular assets and 401K until age 65 and then take social security, my pension annuity, and pension lump sum (rolled over into an IRA) all at the same time for post-age 65 income sources.
How can I model this in ESP? I tried adding an age 65 IRA contribution in the Retirements Folder but ESP would not allow it. (Actually, it sort of allowed it, gave a warning message and then grayed out all profiles, options and menus, then locked up forcing it to be killed with Task Manager.)
What method could be used to simulate taking a deferred pension with lump sum distribution after you have started withdrawing from your retirement accounts? Seems this ought to be a "relatively normal" scenario others would investigate.
Best Regards,
John
RSS
Hi, We're going to add more flexibility wrt specifying retirement account distributions in a new update, which we'll likely post in August. But in the meantime, you can treat the withdrawals between now and age 65 via the special receipts (indicating that they are fully taxable. Re your pension annuity, you'll just enter that as an annual pension. Re your pension lump sum, which you want to roll over into an IRA and, I presume, take smooth withdrawals from starting at 65, I recommend that you do enter the lump sum withdrawal under pensions and enter an IRA contribution. If the program is crashing when you do this, please see if you can replicate this and post a support ticket and we'll fix the problem immediately. But please specify precisely the minimal inputs needed to recreate the problem. In the retirement account inputs screen, make sure that your last age of contribution is greater than 65 if you plan to contribute at age 65.
You can call me next week at 617 834-2148 with any further questions or email me at kotlikoff@gmail.com. best, Larry
Similar problem. I have specified it as LK suggests (enter the lump-sum amt in Pensions and an identical amt as an IRA contribution) but my taxes in 2010 are huge, so evidently ESP thinks I'm getting taxed on the whole rollover amount.
Does the beta have a fix for this? I applied for it and am more than willing to test this if it's part of the new release.
Geoff
I have the same question. If the lump sum is added to the pension and an identical amount is added as an IRA contribution (I entered it as an employer contribution), it creates a huge tax on the year of the pension.
My question....Wouldn't it work out fine if the lump sum pension were simply added as an employer IRA contribution on the year of the lump sum?
Wouldn't that solve the problem of huge taxes on the lump sum distribution year but also effectively roll over the money to the IRA?
Depends on the limits on your IRA contribution. Generally there are limits of some kind, even for employer funded IRAs so, yes, you could just dump the lump sum into an IRA of some kind, but you would have to account for the tax consequences yourself and we don't do that.
FWIW, the flexibility that Larry was referring to above is how ESPlanner handles lump sum distributions from pensions originating from non-social security earnings, e.g., most government jobs. There are rules that basically allow you to treat the lump sum as having been received over time rather than taking the hit all at once. This isn't true for other sorts of pensions generally so you have to take into account any weirdness in tax law that allow you to smear the income from a lump sum distribution over time on your own.
Best,
Dick Munroe
Hi Geoff, I just tested this issue of having a lump sum pension arrive in a future year and entering for that same year a deductible retirement account contribution of equal size. I don't see any tax increase occurring. So I'm thinking you must have some other element in your profile that is leading to higher taxes in the year in question. Call me at 617 834-2148 and we'll sort this out. best, Larry