How to Handle a Plump Payout After you decide which way to take your retirement money -- in a lump sum or in monthly checks -- the real homework begins.
By ERIC SCHURENBERG

People over age 52 who participated in their employer's pension plan before 1974 have yet another option: they can elect to have the portion of the sum attributable to their pre-1974 contributions taxed as capital gains -- at the top 1986 rate of 20%. (Your company benefits department can tell you exactly how much qualifies as capital gains.) These taxpayers can then use five-year or 10-year forward averaging for the rest of their payout. \$ What methods give you the least tax? If none of your distribution qualifies as capital gains, the answer is easy: 10-year averaging if your payout is less than \$473,700. Above that amount the lower tax rates used in five-year averaging outweigh the greater bracket-lowering power of 10-year averaging. In the end, the only way to choose between forward averaging and a rollover is to project the consequences of both into the future and see which alternative rewards you with the most after-tax income. But the numbers do not always have the final word. Larry Silver, a tax partner at the accounting firm Peat Marwick, recalls making all the tax calculations and actuarial assumptions for a 65-year-old client with a retirement lump sum. The bottom line: roll it over into an IRA, postpone withdrawals until 70 1/2 and come out decisively ahead beginning at age 88. The man was not impressed. Recalls Silver: ''He said, 'What do I care about having more money at 88? I want to enjoy it now.' ''

BOX: LUMP SUM VS. ANNUITY

To decide how to take your retirement money, you should project the financial consequences of each option. This table, put together with the help of Paul Westbrook, a retirement planner in Watchung, N.J., reviews the choices open to a couple, both 65, who are faced with a \$250,000 benefit. The first option would be to leave the money in the pension plan, which would pay them an annuity of \$24,000 (\$17,280 after taxes). The payments would continue as long as they lived; however, with 5% inflation, by the time the couple reached age 75 the check would be worth only \$10,346 in 1988 dollars. The remaining four options all require the couple to take the \$250,000 as a lump sum and invest it either in a tax-free bond fund paying 7.3% a year or a taxable bond fund yielding 9%. In each case, they could then withdraw \$17,280 after taxes in the first year and increase the payout by 5% a year to counteract inflation -- so that at age 75 they would still receive the same amount of money in 1988 dollars that they did at age 65. If the couple needed income right away, they could pay the tax up front, taking advantage of the favorable 10-year forward-averaging rate (explained in the accompanying story). Invested in the tax-free fund, the remaining money would last them to age 78. Two less desirable options -- paying the initial tax at the less favorable five-year averaging rate and postponing the tax by rolling over the entire sum into an IRA -- would both exhaust the couple's capital when they reached age 77. The best course, if the couple can let the money grow untouched for five years, would be an IRA rollover. In that case, the sum -- invested in the taxable fund -- would last to age 86.

BOX: Benefits: Terms to remember -- Asset-accumulation plan: An investment account set up by the employer, contributed to by the employer and employee, and managed by the employee. -- 401(k): The best of the capital-accumulation plans. Lets you stash away a tax-deferred \$7,000 a year. Employer often makes matching contributions. -- Life-only annuity: A pension that provides you alone with a certain amount until your death. -- Joint-and-survivor annuity: A pension that keeps paying out until both you and your spouse die. -- Life and period certain annuity: A pension that continues for your lifetime or a specified period. -- Forward averaging: A tax-saving device that allows you to pay income tax on a benefit payout as if you had received the money over five or 10 years.

BOX: HOW DOES YOUR COMPANY PLAN STACK UP?

CHART: Initial Net sum Income* Income* Balance at Age when Option tax invested at age 65 at age 75 age 75 income ends

Pension \$0 \$0 \$17,280 \$10,346 \$0 death

Lump sum with 10-year averaging 50,770 199,230 17,280 17,280 85,330 78

Lump sum with five-year averaging 60,110 189,890 17,280 17,280 66,436 77

IRA rollover with immediate 0 250,000 17,280 17,280 108,882 77 withdrawals

IRA rollover with no withdrawals for 0 250,000 0 17,280 372,865 86 five years

*In after-tax 1988 dollars, assuming inflation of 5% a year

CREDIT: NO CREDIT CAPTION: NO CAPTION DESCRIPTION: Financial data on several retirement plan options.

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