The IRS 417(e) segment rates are three monthly interest rates the IRS publishes to discount a pension’s future annuity payments back to a lump sum value today. The relationship is inverse: when the rates fall, your lump sum rises; when they climb, it shrinks. For January 2026, the first, second, and third segment rates were 4.03%, 5.20%, and 6.12%.1IRS.gov. Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates – Notice 2026-14 A one-point move across those rates can shift a lump sum by tens of thousands of dollars, so understanding which month’s rates will apply to your distribution is often worth more than any other piece of retirement planning you can do in the months before you take the money.
What the Three Segment Rates Are
Section 417(e) of the Internal Revenue Code requires that a defined benefit plan pay a lump sum no smaller than the present value of the annuity you earned, calculated using IRS-prescribed interest rates and an IRS-prescribed mortality table.2Office of the Law Revision Counsel. 26 USC 417 – Definitions and Special Rules for Purposes of Minimum Survivor Annuity Requirements The “applicable interest rate” isn’t one number. It’s three, each covering a different window of your projected payments:
- The first segment rate discounts payments expected in the first five years after your annuity starting date.
- The second segment rate covers years six through twenty.
- The third segment rate covers everything beyond year twenty.
Each rate comes from corporate bond yields for the matching maturity range. Which one matters most depends on your age. A 62-year-old with normal life expectancy has most of their projected payments falling in the second and third segments, so those two rates drive the calculation. A 75-year-old has a shorter projected payment stream, and the first segment rate carries more weight. The segmented approach matches each discount rate to the actual timing of the payments it’s discounting.
The other input is a unisex mortality table the IRS updates each year. The 2026 version appears in Notice 2025-40 and blends 50% male and 50% female mortality rates so that men and women the same age get the same assumed life expectancy for lump sum purposes.3IRS.gov. Updated Static Mortality Tables for Defined Benefit Pension Plans for 2026 The table builds in expected future improvements in longevity, which nudges lump sum values slightly higher each year, all else being equal.
How a Rate Change Moves Your Lump Sum
The segment rates serve as the discount rate in a present-value calculation. A higher discount rate means a smaller amount today can theoretically grow to cover your future annuity payments, so the plan owes you less in cash. A lower discount rate means it takes a larger amount today to produce the same income stream, so the plan owes you more.
The size of the effect is substantial. A drop of roughly one percentage point across the segment rates can lift a lump sum by somewhere in the range of 10% or more, depending on your age and how many years of payments are being discounted. A 60-year-old with a $2,000 monthly annuity might see their lump sum swing by $40,000 or more from a one-point rate change. That’s the mechanical result of present-value math applied over decades of projected payments, not a market forecast.
Which Month’s Rates Apply to Your Distribution
The IRS publishes new segment rates every month, but your plan does not recalculate your lump sum every month. Two plan-level settings determine which month’s rates apply to you: the lookback month and the stability period. Both are written into the plan document and apply uniformly to every participant.
Lookback Month
The lookback month tells you how far ahead of your distribution the plan selects the rates. A plan can set the lookback anywhere from one to five months before the start of the stability period.4eCFR. 26 CFR 1.417(e)-1 – Restrictions and Valuations of Distributions from Plans Subject to Sections 401(a)(11) and 417 A five-month lookback gives you advance knowledge of the rates that will govern your payout, because those rates have already been published by the time the stability period begins.
Stability Period
The stability period is the window during which one set of segment rates governs all lump sum distributions. It can be as short as one calendar month or as long as one calendar or plan year.4eCFR. 26 CFR 1.417(e)-1 – Restrictions and Valuations of Distributions from Plans Subject to Sections 401(a)(11) and 417 A plan with an annual stability period locks in rates for twelve months, which is simple to administer but blocks you from catching a mid-year rate drop. A monthly stability period tracks the market closely and creates more opportunities, and more risk, if you’re trying to time your distribution.
Find your plan’s specific lookback and stability period in your Summary Plan Description, or request them from your plan administrator. If the plan sponsor changes these provisions, anti-cutback protections under Section 411 generally require that your benefit be calculated under whichever rule produces the higher payout during a transition period.5eCFR. 26 CFR 1.411(b)(5)-1 – Reduction in Rate of Benefit Accrual Under a Defined Benefit Plan
Where to Find the Current Rates
The IRS releases segment rates in a monthly Notice that reflects the prior month’s corporate bond yield data. January 2026’s rates, for instance, come from December 2025 yield curve data.1IRS.gov. Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates – Notice 2026-14 You can find the current month’s figures on the IRS pension plan funding segment rates page.6Internal Revenue Service. Pension Plan Funding Segment Rates
One point of confusion worth clearing up: the spot rates used for 417(e) lump sum calculations are not the same as the 24-month average segment rates used for a plan’s minimum funding under Section 430. The funding rates smooth two years of market data to help sponsors budget contributions. The lump sum rates use a single month’s yields, which makes them more volatile and more responsive to market movements.7IRS.gov. Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates – Notice 2025-17 If you’re trying to anticipate your own payout, the spot rates are the ones to watch.
Where the Segment Rates Affect More Than Just Timing
The same rates that move voluntary lump sums also decide whether some benefits get paid out at all. If your total vested benefit has a present value of $7,000 or less, the plan can distribute it as a lump sum without your consent. The SECURE 2.0 Act raised that threshold from $5,000 to $7,000.8IRS.gov. Safe Harbor Explanations – Eligible Rollover Distributions – Notice 2026-13 When rates are high, the present value of your annuity shrinks, which can push a benefit that was sitting just above the line down below it and trigger an involuntary cashout you didn’t request.
At the other end of the spectrum, Section 415(b) caps the annual benefit a defined benefit plan can pay. For 2026, that cap is $290,000 per year.9Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living – Notice 2025-67 When the plan converts your annuity to a lump sum, the underlying annuity cannot exceed the 415 limit. For most participants this cap is irrelevant, but highly paid employees in generous plans may find the lump sum smaller than a straight present-value calculation would suggest, because the annuity itself was already capped before any discounting happened.
What the Plan Must Show You Before You Elect
Before you choose a lump sum, the plan has to give you a “relative value” disclosure comparing the lump sum against the value of the joint-and-survivor annuity, expressed in a way you can read without doing your own present-value math. The plan can satisfy this by showing the lump sum as a percentage of the annuity’s present value, by converting the lump sum into an equivalent monthly annuity, or by stating the present value of both options side by side. The disclosure must also note that the comparison relies on interest and life-expectancy assumptions and that your actual outcome depends on how long you live. Estimates are allowed, but if the plan uses them, it must say so and offer a more precise calculation on request.10eCFR. 26 CFR 1.417(a)(3)-1 – Required Explanation of Qualified Joint and Survivor Annuity and Qualified Preretirement Survivor Annuity
Pay attention to the interest rate shown in the disclosure. It may differ from the 417(e) segment rates if the plan uses more generous assumptions for its own conversion factors, in which case your actual lump sum could be higher than the statutory 417(e) floor. The 417(e) rates define the minimum the plan can pay you. They do not stop a plan from paying more.