Should I take a partial lump-sum option from TRS?

Educators and administrators enrolled in the Teachers Retirement System (TRS) of Texas have an option called the Partial Lump Sum Option (PLSO) upon retirement. This blog post explains what the PLSO is, how it works, and the benefits and drawbacks of taking it.

What is a Partial Lump Sum Option?

At retirement, eligible TRS members may select a Partial Lump Sum Option, or PLSO, in addition to a reduced monthly annuity.

Eligible members may select a PLSO equal to 12, 24, or 36 months of a standard service retirement annuity. When a PLSO is selected, the member’s monthly annuity is reduced to reflect the lump sum distribution. The reduced annuity continues for the life of the member.¹

A 12-month PLSO is paid at the same time as the member’s first monthly annuity payment. A 24-month PLSO may be taken in one or two annual payments. A 36-month PLSO may be taken in one, two, or three annual payments.²

For example, TRS states that a member who retires at age 60 with a $2,000/month annuity and selects a 12-month PLSO would receive a $24,000 lump sum distribution ($2,000 × 12) plus a reduced monthly annuity of $1,833.40/month ($2,000 × 91.67%). If the member then selects an optional retirement annuity, the option factor will be applied to the reduced standard annuity.³

With a PLSO, your monthly annuity payments are permanently reduced because you are receiving part of your benefit upfront. It is important to understand that selecting a PLSO lowers your monthly annuity for life. The PLSO election is irrevocable and cannot be changed after your first monthly annuity payment.

What are the Tax Consequences of PLSO?

PLSO distributions are generally subject to federal income tax withholding. Since these payments are eligible rollover distributions, TRS generally must withhold 20% for federal income tax unless the eligible portion is rolled over into another eligible retirement plan, such as an IRA, 403(b), 401(k), or other qualified retirement plan.⁴

TRS pension income is also taxable at the federal level. If you roll over the PLSO amount into an IRA, you may have more control over when you withdraw the funds and pay income tax. However, the funds will eventually be subject to required minimum distribution rules.

What are the Benefits of PLSO?

1. You can use the PLSO as a reserve for emergencies or unexpected expenses in retirement. This may help you avoid putting emergency expenses on credit cards.
2. You want flexibility in retirement spending. Taking the partial lump sum gives you a choice over what to do with a portion of your TRS retirement benefit. You may wish to pay off a mortgage, reduce debt, or set aside funds for a specific purpose.
3. You want more control over taxation and withdrawals. If you roll over the PLSO into a tax-deferred account, you may be able to control when you pay income tax on those funds.
4. You do not need the full monthly pension amount. If you have other retirement income, Social Security, a spouse’s pension, or investment assets, you may not need the maximum monthly TRS pension.
5. Rolling the PLSO into an IRA can give you more investment flexibility. An IRA may offer more control over investment choices and distribution timing.
6. You are retiring relatively young. Since TRS benefits generally do not receive automatic inflation adjustments, your purchasing power may erode over time. A lump sum invested appropriately could provide flexibility, though it also introduces investment risk.

What are the Drawbacks of PLSO?

1. You want the highest amount of guaranteed monthly pension income possible. TRS reduces your monthly payment when you take the lump sum. This can be especially important for Texas educators who may not be eligible for Social Security.
2. You may be tempted to spend the money too quickly. A lump sum can create flexibility, but it can also lead to overspending. If the money is depleted, you are still left with a permanently reduced monthly pension.
3. You are not comfortable investing. If you roll the PLSO into an IRA, you must decide how to invest it. Poor investment decisions, market losses, or excessive risk could reduce the value of the lump sum.
4. Future increases may be smaller. If post-retirement annuity increases are approved in the future, they are based on the reduced annuity amount, not the amount you would have received without the PLSO.

To Summarize

The PLSO is an option that should be carefully considered. It may be helpful if you have a clear purpose for the funds, such as paying down debt, building reserves, or investing through an IRA. However, it permanently reduces your monthly TRS pension, which can create long-term risk if you need dependable lifetime income.

Before choosing the PLSO, consider your retirement income needs, tax situation, investment comfort level, spouse or survivor income, and whether you have a specific plan for the lump sum.

It may be helpful to speak with a financial planner before making this decision. Reach out if you want to discuss how the PLSO fits into your broader retirement plan.

1. TRS Partial Lump Sum Option

2. TRS PLSO Distribution Amounts

3. TRS PLSO Example

4. TRS PLSO Frequently Asked Questions

*This content is developed from sources believed to provide accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid any federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Neither the information presented nor any opinion expressed constitutes a recommendation to buy or sell any specific investment. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.