Pension - Lump Sum Payment Opportunity

[saholec]

My previous employer recently offered a “One-Time Lump Sum Opportunity” for all eligible pension candidates for separated employees.  They normally only offer this once you officially retire from the company after your eligible retirement age…

The kicker is that I need to make a decision before the opportunity expires.  In a nutshell here are my three options:

1. Lump Sum Payment of $212,001.99
1. Rollover my entire lump sum distribution
2. Rollover a percentage
3. Pay my entire lump sum distribution to me in cash
2. 5-Year Certain & Life Annuity of $941.01 effective 8/1/2022
3. Defer Payment and receive monthly payments of $2575.34 effective 11/1/2024

I am inclined to go Option 1 and invest the proceeds on my own going forward, but what effects would this have on my taxes for 2022?  If I immediately roll these funds over to my Vanguard IRA would that matter?  Also, would this be a good occasion to consider a Roth IRA versus a traditional?  Finally, when this all gets lumped together I still would have to recognize this as income on my W2 side and pay taxes regardless of my decision, correct?  Anything else I should be aware of before making my decision?

I know those are a lot of questions, but didn’t want to regret my decision on this big decision.

Thanks in advance for any advise/suggestions!

[AnthonyC CPA]

When looking at your options if you choose Option 1 and roll over the entire amount to a Rollover IRA there will be no tax impact for 2022.  You can then invest this amount and pay taxes when you receive distributions from the Rollover IRA in the future.

If you convert either some or the entire amount to a Roth IRA you will pay tax on the amount deposited into the Roth IRA in 2022 but will not have to pay taxes on the distributions in the future.  This would include any gains in the Roth IRA account.  In order to make this decision you should think about what moving these funds will do to your taxable income in 2022 vs. what type of taxable income you anticipate to have in the future.  By converting to a Roth this year you will add over $200k to your income and be taxed now but will not have to pay taxes on the distributions in the future.

If you decide to take monthly payments this year the amount that you receive will be taxable this year.