While you don’t have to decide until you’re actually ready to stop working, making the best choice is critical. The factors you have to consider are your age and health, what you want to provide for your family, and what other sources of income you’ll have.
For example, if you’re in poor health and concerned about providing for your spouse, you might choose a joint and survivor pension annuity that will continue to pay while either of you is alive. On the other hand, if your spouse has a good pension from his or her employer or is seriously ill, you might choose a single life annuity that will provide a larger amount for you each month than a joint annuity would. In many cases, this option requires your spouse’s written, notarized consent.
Or, if it’s your employer’s financial health you’re concerned about, you may decide to take your money out of the plan and invest it elsewhere.
When you retire from an organization that provides a traditional pension, you generally have two income choices: a pension annuity or a lump sum distribution.
With an annuity, you receive income each month for the rest of your life or your life and the life of another person, usually but not necessarily your spouse. At the time you retire, your employer calculates the amount you’ll receive based on a number of factors including your age, your final salary, and the number of years you’ve worked for the organization. Income taxes are withheld from each check.
If you choose a lump sum, your employer calculates the amount you’ll receive and transfers the money to an account you designate. If it’s a cash account, income taxes are withheld, whether or not you plan to move the money into an IRA. If you roll over the amount directly to a tax-deferred IRA, income taxes are not due until you withdraw from that account.