Take a $400,000 Pension Lump Sum at 62 and Roll It Into an IRA, and It Turns Into a $26,000 RMD at 73. Take the $2,400 Monthly Pension Instead and Nothing Is Ever Required, but Nothing Is Left for the Kids Either

A worker retiring at 62 with a traditional pension often faces one election that determines the next three decades: take the benefit as a lump sum or take a monthly check for life. In this example, the offer is a $400,000 lump sum or a $2,400 monthly pension, and the two paths lead to different tax rules at 73, including different levels of exposure to inflation and different outcomes for heirs. This means that the decision has both short-term and long-term implications.

How a $400,000 Rollover Turns Into a $26,000 Withdrawal at 73

Money moved into a traditional IRA by direct rollover stays tax-deferred. Federal law requires the plan to withhold 20% of an eligible rollover distribution unless the worker chooses to have it paid directly to another eligible retirement plan, under 26 U.S.C. § 3405(c). Inside the IRA, withdrawals are taxed as ordinary income under 26 U.S.C. § 408(d)(1).

The account must eventually start paying out, as IRS Publication 590-B says owners who turn 72 after December 31, 2022, must begin required minimum distributions by April 1 of the year after they turn 73. The IRS divisor for that first year is 26.5.

A first RMD of $26,000 means an account balance of about $689,000. Growing the lump sum to that level takes an average annual return of roughly 5.1%. If the account earned nothing, the first RMD on the original lump sum would be about $15,094. The RMD in the headline depends on market returns, while the pension amount is set by the plan. The defusing work tends to start well before the first required withdrawal, which is the whole subject of our free guide to the first-year tax bomb.

How $2,400 a Month Compares With Social Security and Spending

The pension pays $28,800 a year, a 7.2% payout rate on the lump sum. Wes Moss, on a September 2026 episode of The Clark Howard Podcast, described a 6% test for these offers: “If it’s 6% or lower, just stick with a lump sum and you’re done.” An offer above that line, like this one, falls in the range where he suggests a closer look at the monthly option.

For comparison, the Social Security Administration estimates the average retired worker benefit at $2,170 a month after the 3.6% COLA for 2027, so the pension alone would exceed it. Against Bureau of Labor Statistics data showing $78,535 in average annual household spending for 2024, the pension would cover about 36.7%.

Pension checks are generally taxed as they arrive. A series of lifetime payments falls outside the definition of an eligible rollover distribution under 26 U.S.C. § 402(c)(4)(A). Because the payments already count as the distribution, you don’t need to calculate a separate RMD.

Fixed Checks Against Rising Prices for Older Households

A fixed pension pays the same amount even as prices rise. The BLS research index for Americans 62 and older, R-CPI-E, rose 3.6% year over year as of September 2026. That index weights housing and medical care more heavily. A $2,400 check that stays at $2,400 buys less each year prices rise. An invested IRA can grow or shrink with markets.

What Each Choice Leaves for Children

A single-life pension stops when the retiree dies. In an April 2026 episode, Moss noted that without a period-certain or survivor option, dying early means giving up the remaining value: “You die in five years. Then they get to keep all the money.” Joint and survivor elections can extend payments to a spouse, usually in exchange for a smaller monthly check.

An IRA passes to the people named as beneficiaries. Most heirs other than a spouse must empty an inherited account within 10 years under 26 U.S.C. § 401(a)(9)(H)(i), and they owe income tax on those withdrawals. IRS data on estate tax returns filed in 2024 show retirement assets on 5,041 returns, totaling $11,704,175,000.

The Federal Reserve’s Distributional Financial Accounts for the second quarter of 2026 show that households ages 55 to 69 hold 47.8% of defined benefit pension entitlements and 49.5% of defined contribution entitlements and annuities.

Medicare Premiums and Other Factors to Track

Pension checks and IRA withdrawals both count as income for Medicare’s income-related surcharges. In 2026, the standard Part B premium is $202.90 a month, but the premium rises to $284.10 for single filers with income above $109,000 or joint filers above $218,000. An RMD this size wouldn’t cross those thresholds on its own, but it adds to Social Security and any other income.

The two options differ in how they handle payments, risk, and remaining value. The pension pays a known $28,800 a year with no investment risk and, under a single-life election, nothing left after. The rollover leaves a balance heirs can inherit, but the outcome depends on returns, how much the retiree withdraws, and how long they live.

Points to compare include the plan’s payout rate against the 6% test, the cost of survivor options, inflation for older households, and the tax brackets of the people who would inherit.

Contact [email protected] for any questions or corrections.