Reviewed September 2026.
Some defined-benefit pensions offer a one-time lump sum instead of (or beside) a monthly annuity. If you elect the lump sum, a direct rollover into a traditional IRA at Fidelity, Vanguard, Schwab, or similar is the usual way to keep the money tax-deferred. A check payable to you can trigger mandatory withholding and a 60-day clock. Decide lump sum vs annuity first: Compare pension lump sum vs monthly annuity. Parallel mechanics for 401(k)s: 401(k) to IRA rollover checklist.
Before you elect the lump sum
- Get the annuity quote and the lump-sum offer in writing with the interest-rate or mortality assumptions the plan used.
- Open the destination traditional IRA (account number ready) before the plan cuts a check.
- Ask the plan for a direct rollover payable to the IRA custodian “FBO [your name],” not to you personally.
- Confirm whether any portion is already after-tax (basis) and how the 1099-R will code it.
- Do not treat a rollover as a Roth conversion unless you intentionally move pre-tax dollars to a Roth and pay tax: Roth conversions.
Account orientation: Roth IRA vs 401(k) starter.
Direct vs payable-to-you
| Path | What happens | Main risk |
|---|---|---|
| Direct / trustee-to-trustee | Plan sends the lump sum to the IRA | Low tax drama when coded as rollover |
| Indirect | Plan pays you; federal law generally requires 20% withholding on the taxable portion of an eligible rollover distribution paid to you | You must deposit the full pre-withholding amount within 60 days or the shortfall is taxable |
Worked example: $180,000 lump sum
Riley’s pension offers $180,000 as a lump sum. The plan mails a check payable to Riley for $144,000 after 20% ($36,000) withholding.
To complete a nontaxable rollover of the full $180,000, Riley must deposit $180,000 into a traditional IRA within 60 days, funding the missing $36,000 from other cash. Depositing only $144,000 generally makes the missing $36,000 a taxable distribution (and possibly a 10% penalty before 59½). Riley immediately asks whether the administrator can cancel the uncashed check and reprocess as a direct rollover to Vanguard “FBO Riley.” Until the plan confirms a correction, Riley still treats the payment as a distribution subject to the 60-day rollover clock and the need to replace withheld dollars from other cash.
After the money posts
If the plan also offered a partial lump sum plus a reduced annuity, treat that hybrid as two decisions: how much guaranteed paycheck you still need, and how much you will roll. Do not assume the IRA rollover “replaces” survivor coverage the annuity would have paid a spouse.
- Re-select investments; a pension lump sum is not automatically a target-date fund.
- Update IRA beneficiaries the same week the cash arrives.
- File the 1099-R and custodian rollover confirmation with your tax PDFs (Filing taxes for beginners).
- Calendar future RMDs from the IRA under IRA rules, which can differ from pension annuity timing.
Checklist
- Compare annuity vs lump sum on paper before electing.
- Open the traditional IRA first.
- Request direct rollover only; avoid pocketing the check.
- If a personal check arrives, ask immediately about canceling an uncashed check for a direct rollover; otherwise top up withheld dollars and complete the rollover within 60 days (or seek an IRS waiver path if you miss it).
- Keep 1099-R / Form 5498 records; set beneficiaries and investments.
Educational only. Not tax, legal, or investment advice. Pension election windows are plan-specific; the 20% federal withholding on taxable eligible rollover distributions paid to you is a federal rule. Confirm with the plan administrator, IRS Publications 575/590-A, and a qualified professional.