Pension Rollover to IRA — New York

A defined benefit pension typically offers two options at retirement: a monthly income for life (with or without a survivor benefit), or a lump sum that can be rolled into an IRA. The monthly income provides certainty — a guaranteed payment regardless of market conditions or how long you live. The lump sum provides flexibility — you control the investment, the withdrawal rate, and the legacy. The right choice depends on your health and life expectancy, your other income sources, your investment discipline, your need for a survivor benefit, and the specific terms of the pension plan. There is no universal right answer.

The break-even analysis compares the cumulative value of the monthly pension income against the projected value of the lump sum invested over time. If you live past the break-even age, the monthly income wins. If you die before it, the lump sum wins. The break-even age depends on the size of the lump sum, the monthly benefit amount, and the assumed investment return on the lump sum. For most pensions, the break-even age is in the mid-to-late 70s — meaning you need to live to at least that age for the monthly income to be the better financial choice. Doug calculates the break-even age for your specific pension and compares it to your health history and family longevity.

If you choose the monthly income option, you must also choose whether to include a survivor benefit for your spouse. Taking the maximum pension — no survivor benefit — gives you the highest monthly payment, but your spouse receives nothing if you die first. Taking a reduced pension with a joint-and-survivor benefit provides income continuity for your spouse but reduces your monthly payment. The reduction depends on the age difference between you and your spouse and the percentage of benefit continued to the survivor. Doug models the after-tax, after-insurance cost of each option — including whether life insurance can replicate the survivor benefit at a lower cost than the pension reduction.

If you take the pension lump sum and roll it directly into a Traditional IRA, there are no immediate taxes. The rollover is tax-free as long as it is executed as a direct rollover. If you take the lump sum as a distribution instead of rolling it, the entire amount is taxable as ordinary income in the year of distribution — potentially pushing you into the highest federal and New York State brackets. New York State does not tax pension income from New York State and local government pensions, but this exemption does not apply to IRA distributions. If you roll a NY government pension into an IRA, future distributions from that IRA are fully taxable by New York State.

Private sector defined benefit pensions — from corporate employers — also offer lump sum options in many cases, particularly when the company is terminating the plan or offering a lump sum window to reduce pension liability. Corporate pension lump sums can be rolled into an IRA with no immediate taxes. The analysis is the same: compare the present value of the monthly income stream against the lump sum, factoring in the financial health of the pension plan (PBGC insurance covers up to $7,107 per month in 2024 for single-employer plans), your health, and your investment return assumptions.