Tax Liability on Lump Sum Pension Benefit for person on 100% Disablility

[marquezjensen]

I receive $16,560.00 annually from Social Security Disability only income. I have been offered a Lump Sum Pension Benefit for less than $33,000.00. I wish to either have it sent directly to me to invest  or have it rolled into an IRA to have it invested. My question is in doing so, will I be taxed on it if I take it as a direct payment instead of rolling it into an IRA. I contacted a Financial Advisor thru my Credit Union and on a Mutual Fund info I was given, the questions were as if I were asking for a Loan and not providing my funds for investment. I am limited in time to make my decision. Is there anyone who knows how this works. I called the IRS both National number and local number and was informed that no one available to answer questions until Tax Time. Isn't that just lovely for our Tax Dollars to provide for us? Please, I do appreciate any and all information that anyone can provide with this. Thank You.

Cecilia Marquez-Jensen

[email address removed]

[DoninGA]

Transferring the Pension Lump Sum payment directly to a Traditional IRA as a Direct rollover means you incur no taxable income from the lump sum payment. 

If you take the pension without rolling it over, then the entire amount or a portion of the amount becomes taxable income to you, depending how your account was funded.  The plan administrator will withhold 20% for federal income taxes if this is a 401(k).  If you are age 59 1/2 or older there will be no early withdrawal penalty.

In January of 2020 you will receive a Form 1099-R for either the roll over or for the distribution, whichever you have chosen.  The Form 1099-R is reported on your tax return for tax year 2019.

If your disability payment is from Social Security, then some of those benefits probably will also be taxable based on the other taxable income you have received.

Up to 85% of Social Security Retirement/Disability/Survivors benefits becomes taxable when all your other income plus 1/2 your social security reaches:

Married Filing Jointly - $32,000
Single or Head of Household - $25,000
Married Filing Separately - 0