My sister’s former employer is offering her a lump-sum buyout of her pension. If she chooses to receive it, she would roll the payout into her IRA account to avoid having to pay taxes. She is trying to figure out whether doing this would impact her son’s current financial aid.
She understands that retirement assets are usually not considered an available asset in the aid calculation, but she is concerned that because she has a choice whether to accept it as income or roll it to an IRA, her son’s school might consider the payout as available income for payment of tuition. Any thoughts?
If she does rollover the funds into an IRA and provides the school with the necessary tax forms to document this, they shouldn’t count it as income as it has been moved to another retirement vehicle. If she does take it as a payout only though…different story.
Just take note…a roll over will not register as such with the IRS data retrieval tool. It will show as income. But this is easily reconciled with the school. My only suggestion would be to file early for aid next year to allow the time to reconcile with your finaid office.
Your sister needs to first figure out if this is a good deal or not for her. I have seen people make very stupid decisions re: finances, pensions, taxes, etc. to keep their kids aid. If you “save” 10K in financial aid but face a loss of a quarter of a million dollars down the road in appreciation, etc. what have you saved?
She needs to model a couple of scenarios based on her age, best-guess as to when she plans to retire, etc. and also investigate if there are other modifications to her retirement plan (i.e. the fine print) which could be triggered by this. If the “loss” of the pension means that she no longer qualifies for retiree health benefits (usually very nice supplemental policies or “blue chip” policies on top of Medicaid) or other company benefits, she needs to calculate the price of that loss as well.
FWIW, I have never, ever seen one of these offers that is as good as the pension it replaces.
As mentioned, the Data Retrieval Tool doesn’t handle this properly. When she communicates to the FA office, keep it very simple – don’t say, “We had the option to take it in cash or to roll it over to an IRA, and we elected to roll it over to an IRA.” Instead, “The $100K that shows as a retirement distribution on line x of our tax return was a non-taxable rollover to my IRA.”
Companies want employees to take lump sum pension payouts because it is better for them to pay a discounted present value amount now calculated at a rate of return in their favor and get the liability off the balance sheet.
As suggested, their are many things to consider before going with the lump sum.