Delaying/Avoiding the Lump Sum IRS 20% Pension Tax

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Eatt Rightt

• January 17, 2020 18:22

I will be receiving my payout in a couple of months and will be turning 65 in March 2020. I need a percentage of the funds to immediately pay off lingering debts (medical/past taxes/credit cards/ and for my spouse and me to live on.

What’s the best way to handle my request without paying the 20% IRS takes off the top when the lump sum is paid?   

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  Benjamin

  • January 20, 2020 00:31

  I don't know much about it, but a quick search suggests you can roll a pension distribution into an IRA account (traditional, I'm assuming, for the tax deduction). Then you would only need to pay taxes at the end of the year on distributions from that IRA. You might look at what tax bracket it would put you in for different withdrawals and find that spacing out repayment of your debts into separate tax years save you more on taxes than the interest you're currently paying.

  "Employers of most pension plans are required to withhold a mandatory 20% of your lump sum retirement distribution when you leave their company. However, you can avoid this tax hit if you make a direct rollover of those funds to an IRA rollover account or another similar qualified plan. Failure to rollover the entire amount of your lump sum distribution may result in your paying unnecessary taxes on all or a portion of your retirement payout."

  More information at https://benefitslink.com/articles/taxbite.html

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