Author Topic: Roll former pension funds into Roth IRA or ???  (Read 4175 times)

destron

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Roll former pension funds into Roth IRA or ???
« on: October 16, 2013, 10:18:49 PM »
Hello,

I was previously a city employee and was contributing during that time to a pension. However, I decided to change careers. I was not working in that position for long enough to be vested in the pension and they simply return the money to me. I am trying to decide what to do with the money.

According to the paperwork, it is possible to roll this money into any IRA (including a Roth), or a 457b (which I have through that employer, although I am not 100% sure yet whether I will have to move that money at some point. I need to get a hold of someone during "business hours").

Some points:

* it is about $60,000, of which $3,000 is non-taxable (not sure why)
* if I roll it into the Roth, I have to pay taxes on it which will be at a marginal rate of 25% for me
* if I roll into the 457b, no taxes now
* if I collect the money, I pay taxes and an additional 10% early distribution tax (don't want to do this)

It seems like a unique opportunity to me to stack my Roth IRA pretty high and get around the limit. Of course, this will be at the expense of 25% of the money. Decisions, decisions. Any thoughts?

destron

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Re: Roll former pension funds into Roth IRA or ???
« Reply #1 on: October 16, 2013, 10:36:42 PM »
Doing some math here:

$45k @ 7% for 20 years ~= $181,743
$60k @ 7% for 20 years ~= $242,325, which is 25% more

It seems obvious now that I am looking at, but the question is really if you think your marginal tax rate will be lower or higher as you withdraw. Because I intend to live on far less thank I am currently making (I already do live on far less), I think it will be a safe bet that my marginal tax rate will be less and I should go for the 457b option.

BTW, my current employer does not offer a 401k, which is really lame. Other than that, it is great though.

extole

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Re: Roll former pension funds into Roth IRA or ???
« Reply #2 on: October 17, 2013, 08:10:57 AM »
Wow, I'm in almost an identical situation that you're in!

I think your 457b is more flexible than mine... I asked them (my 457b plan administrator) if I could roll my unvested pension into the 457b and they said it's not an option since I no longer work for the city.

Nice that you have the option... I agree it's most likely the best bet. Wish I could do it too.


destron

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Re: Roll former pension funds into Roth IRA or ???
« Reply #3 on: October 17, 2013, 09:13:13 AM »
Hmm, I still have to have a meeting with them but in the paperwork they make it seem like I will be able to roll into the 457b. I'm leaning toward doing that, so I hope that option is available to me.

seattlecyclone

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Re: Roll former pension funds into Roth IRA or ???
« Reply #4 on: October 17, 2013, 11:19:14 AM »
If you do roll over to a Roth IRA, pay the taxes out of cash you have on hand rather than out of the IRA principal. Remember you don't have to roll the entire amount over at once. You could put it all in a traditional IRA to start and roll a little bit into your Roth each year as your budget permits (to pay the taxes). Or you could wait until you're retired to make this conversion, since your tax rate will presumably be lower at that time.

Petunia 100

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Re: Roll former pension funds into Roth IRA or ???
« Reply #5 on: October 17, 2013, 12:48:01 PM »
Hmm, I still have to have a meeting with them but in the paperwork they make it seem like I will be able to roll into the 457b. I'm leaning toward doing that, so I hope that option is available to me.

You could also roll into a tradtional IRA, which is exactly what I personally would do.  This gives YOU complete control of custodians, investment vehicles, and costs.  If you decide you do want to convert some or all to a Roth, you can do it slowly rather than all at once.

destron

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Re: Roll former pension funds into Roth IRA or ???
« Reply #6 on: October 18, 2013, 09:25:31 AM »
Thanks for the advice!

Can I roll it into a Traditional IRA if I already have a Roth IRA though? I thought I could only have one, or is that just that they have the same limit on contributions?

My Roth IRA is with Vanguard. Does this mean I can open a traditional IRA with Vanguard as well and roll it into that (and possibly slowly roll that into the Roth as I decide to pay taxes on it)?

Petunia 100

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Re: Roll former pension funds into Roth IRA or ???
« Reply #7 on: October 18, 2013, 10:03:20 AM »
Thanks for the advice!

Can I roll it into a Traditional IRA if I already have a Roth IRA though? I thought I could only have one, or is that just that they have the same limit on contributions?

My Roth IRA is with Vanguard. Does this mean I can open a traditional IRA with Vanguard as well and roll it into that (and possibly slowly roll that into the Roth as I decide to pay taxes on it)?

Yes, you can have both. :)    And yes, the annual limit applies to ALL of your IRA accounts in total, not individually.   You can split the contributions between traditional and Roth as you please.   

Yes, open a traditional at Vanguard.  You can decide each year if you should convert some or all of your traditional to your Roth.   ( And conversions do not count towards towards your contribution limits).

destron

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Re: Roll former pension funds into Roth IRA or ???
« Reply #8 on: October 18, 2013, 12:12:10 PM »
Yes, you can have both. :)    And yes, the annual limit applies to ALL of your IRA accounts in total, not individually.   You can split the contributions between traditional and Roth as you please.   

Yes, open a traditional at Vanguard.  You can decide each year if you should convert some or all of your traditional to your Roth.   ( And conversions do not count towards towards your contribution limits).

Wow, the possibilities have really opened up! I was going to get creamed with taxes if I had to take all that money this year because my situation is considerably more complex than it usually is. The traditional IRA definitely seems nice as I can move a little over every year (and maybe more if I harvest some losses in my taxable account).

beltim

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Re: Roll former pension funds into Roth IRA or ???
« Reply #9 on: October 18, 2013, 02:55:26 PM »
Hmm, I still have to have a meeting with them but in the paperwork they make it seem like I will be able to roll into the 457b. I'm leaning toward doing that, so I hope that option is available to me.

You could also roll into a tradtional IRA, which is exactly what I personally would do.  This gives YOU complete control of custodians, investment vehicles, and costs.  If you decide you do want to convert some or all to a Roth, you can do it slowly rather than all at once.

I agree with this.  Rolling into a traditional IRA is likely best, unless your 457b is better than any traditional IRA out there (unlikely).