Situation guide
Pension lump sum or monthly payments? How a buyout offer fits with Roth conversions
By Secure Retirement PlannerUpdated
If you take a pension lump sum in 2026 and send it straight to an IRA, you owe no tax and nothing is withheld. You can then convert that IRA to a Roth a piece at a time, in low-income years. Monthly pension payments can't be converted at all. For 2026 and beyond, they are taxed as ordinary income every year you get them.
So the Roth question is one of several in your buyout decision. The others are how long you expect to live and whether your spouse needs lifetime income. Interest rates and who backs the payments matter too. Many people worry most about running out of money, and that is a fair thing to weigh. This page goes through each and shows a 2026 example.
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The short version
- Roll your lump sum directly to an IRA. If the plan pays it to you, 20% is withheld. You must then replace it from savings within 60 days to avoid tax on that part.
- If you roll the whole lump sum straight to a Roth IRA, all of it is taxable in one year. Converting in smaller pieces usually costs you less.
- Your lump sum is figured with IRS interest rates. When rates rise, lump sums shrink.
- PBGC insures private pensions up to a yearly limit. Once you take a lump sum, that insurance no longer covers your money.
- Monthly payments give you lifetime income you can't outlive. A lump sum gives you control and Roth choices, but puts the investment and longevity risk on you.
Should I take the pension lump sum or the monthly payments?
It depends mostly on your health, your other income and your spouse. Monthly payments last for your life, and with a survivor option, your spouse's. A lump sum is yours to invest, convert and leave to heirs. But it can run out.
One way to compare: ask what return your lump sum must earn to pay the same monthly amount until a certain age. In our example below, a $350,000 lump sum must earn about 5.6% a year to pay $2,100 a month for 27 years. Do you expect to live longer than that, or not want to manage the money? Then the monthly payment may be worth more to you.
| Question | Monthly payments | Lump sum rolled to an IRA |
|---|---|---|
| Lasts for life? | Yes (and for a spouse, with a survivor option) | Only as long as the money lasts |
| Can it be converted to a Roth? | No | Yes, in any amount, any year |
| Taxed when? | Every year as you receive it | Only when you withdraw or convert |
| Who carries market risk? | The plan | You |
| Left to heirs? | Only through a survivor option | Yes, whatever remains |
| Backed by | The plan, PBGC up to limits | Your investments |
How do I roll a pension lump sum to an IRA without paying tax?
Ask your plan for a direct rollover, where the money goes straight from the plan to your IRA. You owe no tax and nothing is withheld.
If the plan pays the money to you, it must withhold 20% for federal tax, even if you plan to roll it over. You then have 60 days to put the full amount in an IRA. You use other savings to replace the 20%. On a $350,000 lump sum, that is $70,000 you would need to cover until you file your return.
You can also roll straight into a Roth IRA. That counts as a conversion, so the whole pre-tax amount is taxable that year. For most people, it costs less to roll to a traditional IRA and convert over several years. See How much to convert each year for sizing each year's amount.
Your spouse may need to sign
If you're married, your pension usually must pay a joint and survivor annuity. The exception is if your spouse agrees in writing to give it up. Taking a lump sum usually needs that signed consent.
Why do interest rates change the size of my pension lump sum?
Your lump sum is what the plan figures you would need today to replace your future monthly payments. Federal law (section 417(e) of the tax code) sets the lowest interest rates and the life expectancy tables plans must use. The IRS publishes these rates each month, based on corporate bond yields.
Higher rates assume your money would grow faster, so less is needed today. Lower rates mean a bigger lump sum. Many plans use rates from a month well before your payment date. So the number you are quoted may already reflect an earlier rate change.
| Interest rate | Approximate lump sum value |
|---|---|
| 4% | about $378,900 |
| 5% | about $342,100 |
| 6% | about $310,400 |
Is my pension guaranteed if I keep the monthly payments?
Most private-sector pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency. If your plan fails, PBGC pays your benefit up to a legal maximum. For plans ending in 2026, the maximum at 65 is $7,789.77 a month for a single-life payment. It is lower if payments start earlier or include a survivor benefit. Government pensions and church plans usually aren't covered by PBGC.
Some employers move pensions to an insurance company, which then pays you through a group annuity. PBGC no longer covers those payments. They depend on the financial strength and claims-paying ability of the insurer. State guaranty associations give a backstop up to set limits. In many states, that is often $250,000 in present value of annuity benefits per person. Annuities are not FDIC insured.
Say you take a lump sum and later want some guaranteed income again. An annuity bought inside your IRA or Roth IRA is one option. Read about the trade-offs, including surrender charges and limited access to your money, at Guaranteed income in a Roth.
Example: a couple deciding on a $350,000 buyout at 63
Gary is 63 and retired at the end of 2025. His pension offers $2,100 a month for life, with half continuing to his wife Sue. Or he can take a $350,000 lump sum. Sue is 61 and earns $30,000 a year. Gary plans to claim Social Security at 67 and was born in 1963, so his RMDs start at 75.
With monthly payments, their 2026 income is $55,200 and they owe about $2,300 in federal tax. That $25,200 a year will be taxed for life and can't be converted.
If Gary rolls the lump sum directly to an IRA, their 2026 income is just Sue's $30,000. They could convert $103,000 in 2026 and stay in the 12% bracket. That costs about $11,600 in federal tax. Doing that each year until Social Security starts could move most of the lump sum to a Roth at 10% and 12% rates.
If Gary took the lump sum as cash instead, all $350,000 would be taxable in 2026, mostly at 22% and 24%. That would also put their 2026 income in the third Medicare surcharge tier for 2028, when Gary turns 65.
If you get a buyout offer, how you take the money matters as much as whether you take it. A direct rollover keeps your Roth choices open; a cash payout closes most of them.
| Choice | 2026 taxable income | 2026 federal tax | What happens later |
|---|---|---|---|
| Take $2,100 a month | $23,000 | about $2,300 | $25,200 taxed every year for life |
| Roll to an IRA, convert $103,000 in 2026 | $100,800 | about $11,600 | Convert more each year, or leave it in the IRA |
| Take the $350,000 as cash | $347,800 | about $68,668 | 20% ($70,000) withheld at payout |
Hypothetical example using 2026 federal brackets and the joint standard deduction from IRS Rev. Proc. 2025-32. Both spouses are under 65. Assumes no other income and no state tax. The 5.6% break-even return assumes payments until Gary is 90 and ignores the survivor benefit. Pension offers differ; get your plan's figures in writing. Your numbers will differ.
Common questions
Can I roll my pension lump sum directly into a Roth IRA?
Yes, but it counts as a Roth conversion, so the whole pre-tax amount is taxable that year. If you roll to a traditional IRA first, you can convert in smaller pieces.
Is a pension lump sum taxed if I roll it over?
Not if it goes by direct rollover to an IRA or another plan. If it's paid to you, 20% is withheld. Any amount you don't roll over within 60 days is taxable.
Why did my pension lump sum offer go down?
Usually because the IRS interest rates used to figure it went up. Higher rates mean a smaller lump sum for the same monthly benefit.
Does PBGC cover my pension if I take the lump sum?
No. Once the money is paid out, it's yours, and PBGC insurance no longer applies. PBGC covers benefits that stay in an insured plan, up to its limits.
Can I convert my monthly pension payments to a Roth?
No. Your pension payments are taxable income and can't be converted. Only a lump sum rolled to an IRA, or money already in an IRA or workplace plan, can be.
Is there a 10% penalty on a pension lump sum before 59½?
Not on a direct rollover. If you keep the cash, the 10% can apply unless an exception fits. One is leaving your employer in or after the year you turned 55.
Sources
Facts on this page were last checked on November 9, 2026.
- IRS: Rollovers of retirement plan and IRA distributions · No withholding on direct rollovers, 20% withholding otherwise, 60-day rule. Read Nov 9, 2026.
- IRS: Minimum present value segment rates · Monthly section 417(e) rates used to figure lump sums. Read Nov 9, 2026.
- PBGC: Maximum monthly guarantee tables · Single-employer guarantee limits by age and year. 2026 age-65 figure of $7,789.77 a month confirmed in the PBGC 2024 Pension Insurance Data Tables and FY 2025 Annual Report. Read Nov 9, 2026.
- NOLHGA: FAQs on product coverage · Guaranty association coverage of $250,000 in present value of annuity benefits in most states. Read Nov 9, 2026.
- IRS: Retirement topics, Qualified joint and survivor annuity · Spousal consent needed to waive the survivor annuity. Read Nov 9, 2026.
- IRS Rev. Proc. 2025-32 (2026 inflation adjustments) · 2026 brackets and standard deduction. Read Nov 9, 2026.
Who wrote this
This guide was written and fact-checked by the Secure Retirement Planner editorial team using IRS, CMS and Social Security sources listed above. We update guides when the law or yearly limits change. How we research.