As retirement approaches, it's important to have a plan as to how to receive the money accumulated in your employer-sponsored retirement plan. Basically, you're faced with two broad options: receive your retirement fund payout as a lump sum, or as an annuity. • The Annuity Option • Lump Sum Distribution The Annuity Option Depending on the flexibility of your company's pension plan, the annuity option may not only be your best option, it may be your only one. An annuity is a fixed monthly payment paid to you for the duration of your life. There are certain advantages to receiving an annuity, including the following: • There is no initial tax on the entire value of your retirement fund - each payment is taxed as ordinary income. • You avoid squandering a large sum of money at once, or losing your entire nest egg on a single bad investment. • If you're married and your pension plan allows it, you may have the option to elect a joint and survivor annuity, which provides a lower monthly payment, but continues to pay your spouse a portion of your retirement income in the event of your death. There are also some disadvantages to receiving the annuity option, including: • You lose the flexibility of having a large sum of money to invest at your discretion. • Even modest inflation rates can erode your purchasing power over time. Lump Sum Distribution The lump sum distribution option allows you to receive the full value of your account in one single payment. The principal is yours to reinvest in order to provide income, or to spend any way you wish-for your children, your grandchildren, healthcare or simply travel. In taking a lump sum distribution, keep in mind that it's important to consider the many tax consequences involved. The advantages of receiving a lump sum pension plan distribution include the following: • You enjoy the flexibility of having a large sum of money to invest at your discretion. • You retain control of the principal to use in any way you wish. Here are some of the disadvantages of receiving a lump sum pension plan distribution: • There is usually a 10% tax penalty on lump sum distribution taken before age 59 1/2 if not rolled over into IRA within 60 days of distribution. • Lump sum distributions are subject to 20 percent withholding toward income taxes unless there is a direct trustee-to-trustee transfer of employer-sponsored pension funds to a traditional IRA or other qualified plan. Before you take any action, it would be wise to consult with a tax professional who can assess you on your particular situation. Remember to choose carefully, since the consequences of your decision will follow you into your retirement.