Dave Says
Advice from Nashville's leading Financial Aid Advisor Dave Ramsey
Author of Financial Peace and The Total Money Makeover
Should I participate in lump sum distribution?
I'm being offered an early retirement package and I have the ability to get a lump sum distribution of my pension package. Would I be able to draw from the dividends and interest of that pension before I'm 59 ½ without a penalty? Also, what's the 72(t) rule? What about a lump sum distribution from my 401(k)?
I'll be doing some other kind of work. I'm not looking to stay home and fish. I'm just wondering if there is any way to get any money out of these between 50 and 59 ½ years old.
Richard in Pittsburgh, PA
Dear Richard,
No. A lump sum distribution would have to be rolled into an IRA in order to keep from paying taxes and penalties on it. Once it's rolled into an IRA, you know the rule, you can't pull anything on it until you're 59 ½ without getting hit with taxes and penalties.
The 72(t) rule is distribution of a small percentage of your 401k. It's generally based on a life expectancy table and you can withdraw about 6% per year (for five years or until age 59 ½, whichever period is longer). That's basically not going to be a lot of money. I wouldn't fool with that. I'd let it continue to grow.
If you're leaving your company, the lump sum distribution is almost always the way to go, because most of these pension plans - on the long-term payout - are calculated on about a 7% discount rate. Ninety-nine times out of 100 you're much better to take the lump sum and roll it into a good IRA in a good mutual fund.
All of this would apply to your 401(k) distribution as well. There are taxes and penalties for early withdrawals there as well, so roll that into an IRA too. I think you'd be better off in your long-term planning to just leave all this alone, let the interest compound and go earn your living.
- Dave
8/17/2004
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