The IRS Section 417(e) segment rates are the three interest rates a defined benefit plan must use to convert your pension into a lump sum, and they move your payout in the opposite direction from the rates themselves: when the rates go up, your lump sum shrinks; when they fall, it grows. For January 2026, the rates were 4.03% for the first segment, 5.20% for the second, and 6.12% for the third.1IRS.gov. Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates – Notice 2026-14 A shift of roughly a single percentage point across those rates can change a lump sum by 10% or more, so the month whose rates apply to your distribution is worth understanding before you sign anything.
Why the Rates Move Your Payout in the Opposite Direction
A lump sum is the present value of the annuity you earned. The segment rates are the discount rate in that present-value calculation. A higher discount rate means a smaller sum today can theoretically grow to cover your future annuity payments, so the required lump sum falls. A lower discount rate means a larger sum today is needed to generate that same stream, so the lump sum rises.
The size of the effect surprises people. A one-percentage-point drop across the segment rates can push a lump sum up by around 10% or more, depending on your age and how many years of projected payments are being discounted. A 60-year-old with a $2,000 monthly annuity might see the payout swing by $40,000 or more from a one-point rate change. That is not a projection about markets; it is the mechanical result of present-value math applied to decades of future payments.
Federal law only sets a floor here. Section 417(e) of the Internal Revenue Code says the plan cannot pay you a lump sum worth less than the present value of your annuity calculated with the IRS-prescribed interest rates and mortality table.2Office of the Law Revision Counsel. 26 USC 417 – Definitions and Special Rules for Purposes of Minimum Survivor Annuity Requirements A plan can pay more than this minimum. It cannot pay less.
What Each of the Three Segment Rates Covers
The “applicable interest rate” under Section 417(e) is really three rates, each applied to a different window of your projected annuity payments:
- The first segment rate discounts payments expected in the first five years after your annuity starting date.
- The second segment rate discounts payments expected in years six through twenty.
- The third segment rate discounts all payments expected beyond year twenty.
Each rate is drawn from corporate bond yields for the matching maturity range. Which of the three matters most depends on your age. A 62-year-old with a normal life expectancy has most projected payments falling in the second and third segments, so those two rates carry the most weight. A 75-year-old taking a lump sum has a shorter projected payment stream, so the first segment rate does more of the work.
The Mortality Table Is the Other Half of the Math
The segment rates set the discount; the IRS mortality table sets how many payments are being discounted. The 2026 version appears in Notice 2025-40. It is a blended unisex table, 50% male and 50% female, so men and women of 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 also builds in expected future longevity improvements, so life expectancy assumptions creep upward each year. Longer assumed lifespans mean more projected payments, which nudges lump sum values slightly higher over time, all else equal.
Which Month’s Rates Actually Apply to You
The IRS publishes new segment rates every month, but your plan does not recalculate lump sums every month. Two settings written into your plan document decide which month’s rates apply to your distribution: the lookback month and the stability period. These apply uniformly to every participant, and they are the reason two people retiring from the same plan a few weeks apart can get very different payouts.
Lookback Month
The lookback month tells you how far ahead of your distribution the plan reaches back to grab the applicable 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 administrators processing time and gives you advance visibility, because those rates are already published by the time your stability period begins.
Stability Period
The stability period is the window during which one set of segment rates governs every lump sum the plan pays out. Plans can choose a stability period as short as one calendar month or as long as a full plan or calendar year.4eCFR. 26 CFR 1.417(e)-1 – Restrictions and Valuations of Distributions from Plans Subject to Sections 401(a)(11) and 417 An annual stability period locks in rates for twelve months, which is simpler to administer but means a mid-year rate drop will not help you. A monthly stability period tracks the market closely and creates more opportunity, and more risk, if you are trying to time a distribution.
Your plan’s Summary Plan Description spells out both settings, and the plan administrator can confirm them in writing. This is the single most important thing to pin down before choosing a distribution date. If the plan sponsor changes these provisions, the anti-cutback rules 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 a new set of segment rates every month based on the prior month’s corporate bond yield data. January 2026’s rates, for example, reflect December 2025 yield curves.6]IRS.gov. Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates – Notice 2026-14 These are called spot rates and can be tracked on the IRS pension plan funding segment rates page or in the monthly Notices posted to IRS.gov.7Internal Revenue Service. Pension Plan Funding Segment Rates
One distinction is worth flagging so you do not read the wrong number. The spot rates that drive 417(e) lump sums are not the same as the 24-month average segment rates used to set a plan’s minimum funding obligations under Section 430. The funding rates smooth two years of market data. The lump sum rates do not.8IRS.gov. Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates – Notice 2025-17 When you check the monthly Notices, look for the 417(e) spot rates, not the funding averages.
Rate Shopping and Its Limits
People in the pension world call the practice of choosing a distribution date to capture favorable rates “rate shopping.” Whether you can actually do it depends entirely on your plan’s stability period. If the plan resets rates monthly or quarterly, monitoring the IRS Notices and coordinating with your plan administrator can meaningfully move your payout. If the plan uses an annual stability period, your window is once a year and the choice is largely made for you.
Two boundary points are worth knowing so you do not misjudge what the rates can do:
The Section 415(b) annual benefit cap. Even when segment rates are low and lump sums are running high, Section 415(b) caps the annual benefit a defined benefit plan can pay. For 2026 that limit 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 The annuity used in the lump sum calculation cannot exceed that cap. Most participants never touch it; highly compensated employees in generous plans sometimes do.
The $7,000 involuntary cashout threshold. If your total vested benefit has a present value of $7,000 or less, the plan can force a lump sum distribution without your consent. SECURE 2.0 raised this threshold from $5,000.10IRS.gov. Safe Harbor Explanations – Eligible Rollover Distributions – Notice 2026-13 The same 417(e) rates that shape voluntary lump sums also decide whether your benefit sits above or below that line. When rates rise, the present value of a small annuity shrinks, and a benefit that was just over the threshold can drop under it, triggering a cashout you did not request.