How to Exclude a Lump Sum Pension Distribution
When you receive a pension lump-sum amount, you're getting more than just a lifetime of retirement savings. You're taking on a significant responsibility. You must manage your retirement savings wisely, or you'll lose a significant income source that cannot be replaced. Lump-sum pension distributions are normally taxed when you receive them as cash. You can exclude the pension from taxation, temporarily, by merely rolling this money over into a different type of retirement plan.
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Instructions
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Contact an individual retirement account custodian. This is a bank or insurance company that you want to hold your pension funds for you.
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Fill out an application for the IRA. You will be establishing an account with the institution before you transfer the funds over to them. They may require you to deposit the funds within a certain amount of time, or they may request that you submit your application with the transfer request form.
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Get a transfer request form from your pension administrator. This request form is filled out with your new IRA custodian and then submitted to the new custodian. Your new financial institution contacts your pension administrator and requests that your all of your pension plan funds be transferred to the new IRA.
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Verify the transaction is completed. This may take several weeks. However, if you haven't heard any updates after four weeks, contact your new IRA custodian as well as your former pension plan and inquire about the status of the transfer.
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Tips & Warnings
You have to withdraw funds in your IRA when you reach age 70 1/2 and pay tax on them. However, you are not required to make a full withdrawal. You must, however, make required minimum withdrawals according to table III in the appendix of Internal Revenue Service publication 590.
You may convert your pension or IRA to a Roth IRA. This won't avoid or exclude the pension from income tax. You pay income tax on all converted funds. However, all future withdrawals from the Roth IRA are tax-free as long as you hold the account for at least five years and are at least age 59 1/2.
