A $400,000 Pension Lump Sum Rolled Into an IRA Can Become a $26,000 RMD at 73, While a $2,400 Monthly Pension Avoids Required Withdrawals but Leaves No Inheritance

A $400,000 pension lump sum and a $2,400 monthly pension may look like two ways to retire on the same terms, yet they lead to very different tax treatment, inflation exposure and inheritance results over time.

For a worker retiring at 62 with a traditional pension, the key decision can shape decades: accept the benefit as a lump sum or take a monthly payment for life. Here, the choice is between a $400,000 lump sum and a $2,400 monthly pension, and each route creates different tax consequences at 73, different inflation protection and different results for heirs. The decision carries both near-term and longer-term implications.

How a $400,000 Rollover Can Lead to a $26,000 Withdrawal at 73

If the money is rolled directly into a traditional IRA, it remains tax-deferred. Under federal rules, a plan generally must withhold 20% of an eligible rollover distribution unless the payment goes directly into another eligible retirement plan, and IRA withdrawals are taxed as ordinary income.

Eventually, the account must begin distributing money. IRS guidance says owners who turn 72 after December 31, 2022, must start required minimum distributions by April 1 of the year after they turn 73. For the first year, the IRS divisor is 26.5.

A first RMD of $26,000 would imply an account balance of about $689,000. Reaching that level from the original lump sum would require an average annual return of roughly 5.1%. If the money earned nothing, the first RMD on the original lump sum would be about $15,094. The size of the required withdrawal therefore depends on investment performance, while the pension payment itself is fixed by the plan.

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

The pension would pay $28,800 a year, equal to a 7.2% payout rate on the lump sum. Wes Moss, on an episode of The Clark Howard Podcast, described a 6% test for offers like this: “If it’s 6% or lower, just stick with a lump sum and you’re done.” An offer above that level, such as this one, is the kind he says deserves a closer look on the monthly side.

For context, 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 be higher. Compared with Bureau of Labor Statistics data showing average annual household spending of $78,535 for 2024, the pension would cover about 36.7% of that amount.

Pension payments are generally taxed as received. A stream of lifetime checks is not treated as an eligible rollover distribution, so there is no separate required minimum distribution calculation.

Fixed Payments Versus Rising Costs for Older Households

A fixed pension stays the same even as prices increase. The BLS research index for Americans 62 and older, R-CPI-E, was up 3.6% year over year as of September 2026, with housing and medical care weighted more heavily. A $2,400 payment that never changes buys less each year when prices rise. An IRA, by contrast, can grow or shrink with the market.

What Each Choice Leaves to Children

A single-life pension ends when the retiree dies. Moss noted that without a period-certain or survivor feature, dying early means forfeiting any remaining value: “You die in five years. Then they get to keep all the money.” Joint-and-survivor options can continue payments to a spouse, usually in exchange for a smaller monthly amount.

An IRA, however, can pass to named beneficiaries. Most non-spouse heirs must empty an inherited account within 10 years, and the withdrawals are taxable as income. IRS estate tax data from filed returns showed 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 Watch

Both pension income and IRA withdrawals count toward Medicare’s income-related surcharges. In 2026, the standard Part B premium is $202.90 a month, but it rises to $284.10 for single filers above $109,000 in income or joint filers above $218,000. A withdrawal of this size would not by itself trigger those levels, but it would be added to Social Security and any other income.

The two choices differ on payment certainty, risk and leftover value. The pension offers a known $28,800 a year with no investment risk and, under a single-life election, no remaining balance. The rollover leaves an account that heirs can inherit, but the result depends on market returns, withdrawals and longevity.

When comparing the options, key points include the plan’s payout rate versus the 6% test, the cost of survivor benefits, inflation for older households and the tax brackets of potential heirs.