Retirees Use IRA Rollovers to Defer Pension Lump Sum Taxes

Retirees choosing a pension lump sum over monthly lifetime payments can defer federal taxes by utilizing a direct trustee-to-trustee rollover into a traditional IRA. Under Internal Revenue Code Section 402(c) and Section 401(a)(31), this direct method avoids immediate withholding.

In contrast, the Internal Revenue Service mandates a 20% federal income tax withholding for indirect rollovers, where payments are made directly to the participant. To avoid taxes and penalties in these cases, participants must deposit the full original amount, including the withheld 20%, into an IRA within 60 days.

While lump sums offer liquidity and investment control, they eliminate guaranteed lifetime payments backed by the Pension Benefit Guaranty Corporation. Tax deferral remains temporary; the SECURE 2.0 Act of 2022 requires minimum distributions starting at age 73 or 75, depending on the birth year, at which point withdrawals become taxable.