Author Topic: Rolling Over a Pension, Question Re: Vanguard Plans  (Read 2603 times)

ltt

  • Pencil Stache
  • ****
  • Posts: 743
Rolling Over a Pension, Question Re: Vanguard Plans
« on: March 07, 2016, 06:26:57 AM »
Hi, a question.....my husband is going to be rolling over a pension amount, more than likely into a Vanguard IRA account.  We already have funds in Vanguard.  We're thinking that his pension plan was pre-tax.  My husband is 57 and his pension will need to be rolled over by the end of this year.  It's my understanding if we roll over into a Roth IRA, he can't withdraw before age 59.5 due to the 5-year rule??  So, he would not be able to withdraw until the year 2022 as these funds will not go into Vanguard until the beginning of 2017.  So, that would mean a traditional IRA if we are looking to withdraw the funds around age 59.5, but we really don't think we will need this money before 5 years.  I hope I'm thinking through this correctly.

Also, are all Vanguard IRA plans set up where you can withdraw the money when you want?  What I'm asking is, let's say my husband is 64 years old and we don't need the money that year, or my husband is 69 and only needs a few thousand dollars out of that account for a year, is that something that can be done, or would he be obligated to take a set amount each year.  Are there certain funds at Vanguard that allow you to do that?  Or must he take a specific amount each year?  What questions do we need to be asking Vanguard?

Thanks,

ender

  • Walrus Stache
  • *******
  • Posts: 5577
Re: Rolling Over a Pension, Question Re: Vanguard Plans
« Reply #1 on: March 07, 2016, 06:30:58 AM »
Rolling over to a Roth IRA might entail a very high tax bill on the amount too. If you are talking about $250k worth of pension, your questions need to be different than $20k.

For example, if you have a $250k pension, it's likely better for you to make it a traditional IRA and then just incur the early withdrawal penalties than it is to convert the whole amount to Roth in one year.



Gin1984

  • Magnum Stache
  • ******
  • Posts: 4851
Re: Rolling Over a Pension, Question Re: Vanguard Plans
« Reply #2 on: March 07, 2016, 06:54:46 AM »
Why is he rolling over a pension amount? Is he not vested?  The company may want him to roll it, but that may not be best for him.

ltt

  • Pencil Stache
  • ****
  • Posts: 743
Re: Rolling Over a Pension, Question Re: Vanguard Plans
« Reply #3 on: March 07, 2016, 07:08:33 AM »
Rolling over to a Roth IRA might entail a very high tax bill on the amount too. If you are talking about $250k worth of pension, your questions need to be different than $20k.

For example, if you have a $250k pension, it's likely better for you to make it a traditional IRA and then just incur the early withdrawal penalties than it is to convert the whole amount to Roth in one year.




Can you tell me why this is, or where do I look to read?  Does it have to do with going from a pre-tax pension into a Roth??  I'm confused.

Our question would be for the higher amount.

ltt

  • Pencil Stache
  • ****
  • Posts: 743
Re: Rolling Over a Pension, Question Re: Vanguard Plans
« Reply #4 on: March 07, 2016, 07:14:35 AM »
Why is he rolling over a pension amount? Is he not vested?  The company may want him to roll it, but that may not be best for him.

The pension was frozen years ago and now the plan is being terminated.  And now, we have a few options.  Roll it over, wait until his normal retirement date and take a monthly payment then, and take an immediate annuity amount.  We won't be taking the immediate annuity amount as that would put us in a higher tax bracket, and we would basically receive 1/3 of the amount on a monthly basis due to taxes.  We could wait until the normal retirement date and take a monthly payment, but I'm a firm believer in the time value of money and our CPA has also suggested the rollover.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5217
Re: Rolling Over a Pension, Question Re: Vanguard Plans
« Reply #5 on: March 07, 2016, 01:27:28 PM »
The pension plan administrators are also firm believers in the time value of money.  Why did the CPA recommend taking the lump sum rollover?  Did he calculate the cost of purchasing a deferred annuity and compare that to the lump sum?  In your shoes, I would look at that calculation as part of my decision-making process.

Rolling a pension into a Roth IRA is the same as taking the money out.  It's a taxable event.  In most situations, the traditional IRA rollover is the better choice.

ltt

  • Pencil Stache
  • ****
  • Posts: 743
Re: Rolling Over a Pension, Question Re: Vanguard Plans
« Reply #6 on: March 07, 2016, 03:59:32 PM »
The pension plan administrators are also firm believers in the time value of money.  Why did the CPA recommend taking the lump sum rollover?  Did he calculate the cost of purchasing a deferred annuity and compare that to the lump sum?  In your shoes, I would look at that calculation as part of my decision-making process.

Rolling a pension into a Roth IRA is the same as taking the money out.  It's a taxable event.  In most situations, the traditional IRA rollover is the better choice.

Yes, I did some more reading today, so, it would be in a traditional IRA.  No, the CPA did not do the calculations of a deferred annuity.  I'm assuming there is a calculator on the web that will give this info?

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5217
Re: Rolling Over a Pension, Question Re: Vanguard Plans
« Reply #7 on: March 07, 2016, 05:49:26 PM »
Both Vanguard and Fidelity sell annuities.  Knowing the date the pension payment starts, the amount of the payment, and whether the pension has a COLA should be enough information to determine how much you would have to pay today to purchase the same deferred pension annuity from those two low cost sources.

Another consideration is the termination of the plan.  Has the company turned the plan over to an insurance company?  Who is responsible for paying the pension now that the plan has been terminated?

Why did the CPA suggest rolling the lump sum over to an IRA?  If he did not do an annuity calculation, what was his reason?

MDM

  • Senior Mustachian
  • ********
  • Posts: 10369
Re: Rolling Over a Pension, Question Re: Vanguard Plans
« Reply #8 on: March 07, 2016, 06:25:40 PM »
What I'm asking is, let's say my husband is 64 years old and we don't need the money that year, or my husband is 69 and only needs a few thousand dollars out of that account for a year, is that something that can be done...?
We'll take the easiest one first: with some exceptions that most likely will not apply to you, the answer is "yes".

Quote
We won't be taking the immediate annuity amount as that would put us in a higher tax bracket, and we would basically receive 1/3 of the amount on a monthly basis due to taxes.
Wow!  A 67% tax rate?  Are you sure?

And now, we have a few options.  [1]Roll it over, [2]wait until his normal retirement date and take a monthly payment then, and [3]take an immediate annuity amount.
...
I'm assuming there is a calculator on the web that will give this info?

There are multiple ways to analyze this.  Comparing your options to the cost of buying a commercial annuity is a good reference point.  You can also do some what-if?s on your own.

E.g., the chart below looks at the option between a $400K lump sum and $30K/yr with no COLA.  This would compare your option #1 with option #3.



To look at option #1 vs. option #2, consider the following:
One way to evaluate "pension now"  vs. "pension later"
Compare pension payment promised at the later time to either
  - the "Interest generated by Future Value" (Future Value principal is not touched), or
  - the "Constant withdrawal of FV over time L" (principal goes to zero), or
  - "Trinity-style withdrawal of FV over time L" (annually inflated spending; principal -> zero)
Lump sum nowPV$400000
Payment starting nowPmt_now0$/payment
Interest ratei5.0%/yr
number of yearsn5yr
number of payments/yearfreq1/yr
When payments are made for each ntype00 = at end, 1 = at start
Future ValueFV$510513
Interest generated by Future ValueFV(i,n,P) * i25526$/payment
Longevity of future pensionL30yr
Constant withdrawal of FV over time LPmt_future33210$/payment
Spending growth rate (e.g., CPI)g2.0%/yr
First year Trinity-style withdrawalW(FV,L,i,g)25110$/yr
2092$/mo

In other words, depending on the assumptions you choose, the $400K lump sum now might be "worth"
- $25,526/yr forever, or
- $33,210/yr for 30 years (and then the payments stop), or
- $25,110/yr, increasing by 2%/yr, for 30 years (and then the payments stop).

See the 'Misc. calcs' tab in the spreadsheet you can download from http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228 if you want to enter your own numbers.

ltt

  • Pencil Stache
  • ****
  • Posts: 743
Re: Rolling Over a Pension, Question Re: Vanguard Plans
« Reply #9 on: March 08, 2016, 01:36:21 PM »
Oops, around 1/3 would go to taxes. :)