Taxes and rolling over pension lump sum

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Planner01
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Taxes and rolling over pension lump sum

Post by Planner01 »

DH recently left a long term job and with it there’s a six figure lump sum pension available to him which we have the option of taking as an annuity or rolling it over to an IRA. We want to take the money and put it in an IRA. However.... we do a backdoor Roth IRA every year and having this money in a traditional IRA would complicate things (Pro Rata Rule). Thus, I am thinking we are going to have to pay the taxes to roll it from traditional to Roth so that we can continue to do the backdoor contribution.

Is there another approach we should consider?
RetiredAL
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Re: Taxes and rolling over pension lump sum

Post by RetiredAL »

Do look at how much of that "lump" rollover IRA can be converted each year without raising your tax rate for that year. Doing it multi-year achieves the same result at a potentially lower tax cost.

While doing this multi-year conversion, you can continue to yearly contribute non-deductible $ to the IRA and convert it too as part of that sequence.
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AndrewXnn
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Re: Taxes and rolling over pension lump sum

Post by AndrewXnn »

Surprising if a pension lump contains any post tax contributions.

Never the less, even if it does, then that is what is required.
Should not be a determent.
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Re: Taxes and rolling over pension lump sum

Post by placeholder »

Is he required to take or can he leave it there and get interest credits or does he have a 401k or similar plan that can take the rollover?
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Planner01
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Re: Taxes and rolling over pension lump sum

Post by Planner01 »

placeholder wrote: Sat Apr 10, 2021 6:50 pm Is he required to take or can he leave it there and get interest credits or does he have a 401k or similar plan that can take the rollover?
If he leaves it there it will grow at a 4.5% rate and the annuity is of a monthly payment. We can do much better by investing it ourselves and having the ability to pass down that money to our heir. In the annuity the paymenfs stop after he passes it to me.
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Planner01
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Re: Taxes and rolling over pension lump sum

Post by Planner01 »

RetiredAL wrote: Sat Apr 10, 2021 5:39 pm Do look at how much of that "lump" rollover IRA can be converted each year without raising your tax rate for that year. Doing it multi-year achieves the same result at a potentially lower tax cost.

While doing this multi-year conversion, you can continue to yearly contribute non-deductible $ to the IRA and convert it too as part of that sequence.
Good thinking. Will need to consult with an accountant to see what’s the best way to do this across multiple years. I didn’t know this was possible. I thought it was all at once, hence why I was cringing on that tax bill.
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Re: Taxes and rolling over pension lump sum

Post by placeholder »

Planner01 wrote: Sat Apr 10, 2021 6:57 pm If he leaves it there it will grow at a 4.5% rate and the annuity is of a monthly payment. We can do much better by investing it ourselves and having the ability to pass down that money to our heir. In the annuity the paymenfs stop after he passes it to me.
You certainly can't do better for similar risk but the inheritability for future generations is a good point so that leads back to the 401k question and of course if he doesn't have on in a new job yet (it's not clear if he's changing jobs or retiring) then you could leave it where it is until that set up but I would not convert a lump that size to roth.
RetiredAL
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Re: Taxes and rolling over pension lump sum

Post by RetiredAL »

Planner01 wrote: Sat Apr 10, 2021 6:58 pm
RetiredAL wrote: Sat Apr 10, 2021 5:39 pm Do look at how much of that "lump" rollover IRA can be converted each year without raising your tax rate for that year. Doing it multi-year achieves the same result at a potentially lower tax cost.

While doing this multi-year conversion, you can continue to yearly contribute non-deductible $ to the IRA and convert it too as part of that sequence.
Good thinking. Will need to consult with an accountant to see what’s the best way to do this across multiple years. I didn’t know this was possible. I thought it was all at once, hence why I was cringing on that tax bill.
You roll-over the entire lump into the IRA as the first step and then multi-year convert that IRA to Roth. While in the multi-year conversion process, it make little difference whether your additional yearly contributions are deductible or non-deductible, since in the end they will all be converted.
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Planner01
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Re: Taxes and rolling over pension lump sum

Post by Planner01 »

placeholder wrote: Sat Apr 10, 2021 7:02 pm
Planner01 wrote: Sat Apr 10, 2021 6:57 pm If he leaves it there it will grow at a 4.5% rate and the annuity is of a monthly payment. We can do much better by investing it ourselves and having the ability to pass down that money to our heir. In the annuity the paymenfs stop after he passes it to me.
You certainly can't do better for similar risk but the inheritability for future generations is a good point so that leads back to the 401k question and of course if he doesn't have on in a new job yet (it's not clear if he's changing jobs or retiring) then you could leave it where it is until that set up but I would not convert a lump that size to roth.
You can move pension funds that his old employer contributed to (this is separate from the 401k) to a new 401k? I thought you could only do that 401k to 401k.
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Planner01
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Re: Taxes and rolling over pension lump sum

Post by Planner01 »

RetiredAL wrote: Sat Apr 10, 2021 7:17 pm
Planner01 wrote: Sat Apr 10, 2021 6:58 pm
RetiredAL wrote: Sat Apr 10, 2021 5:39 pm Do look at how much of that "lump" rollover IRA can be converted each year without raising your tax rate for that year. Doing it multi-year achieves the same result at a potentially lower tax cost.

While doing this multi-year conversion, you can continue to yearly contribute non-deductible $ to the IRA and convert it too as part of that sequence.
Good thinking. Will need to consult with an accountant to see what’s the best way to do this across multiple years. I didn’t know this was possible. I thought it was all at once, hence why I was cringing on that tax bill.
You roll-over the entire lump into the IRA as the first step and then multi-year convert that IRA to Roth. While in the multi-year conversion process, it make little difference whether your additional yearly contributions are deductible or non-deductible, since in the end they will all be converted.
I understand now! I’d have to play with the numbers to see how much of it can be converted without pushing us to a new tax bracket.
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Re: Taxes and rolling over pension lump sum

Post by placeholder »

Planner01 wrote: Sat Apr 10, 2021 7:31 pm You can move pension funds that his old employer contributed to (this is separate from the 401k) to a new 401k? I thought you could only do that 401k to 401k.
It's going to depend on the plan rules but they are allowed to take in iras and probably pension rollovers directly.
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Re: Taxes and rolling over pension lump sum

Post by placeholder »

Planner01 wrote: Sat Apr 10, 2021 7:32 pm I understand now! I’d have to play with the numbers to see how much of it can be converted without pushing us to a new tax bracket.
That's going to interfere with backdoor roth each year plus I would be reluctant to convert at what might be your highest tax rate (what is it?).
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Re: Taxes and rolling over pension lump sum

Post by Eagle33 »

Wow! This is the most pro-Pro Rata thread on this forum that I have seen since joining. Most other threads are overly anti-Pro Rata rule, some even giving the impression it is impossible to do a Backdoor Roth if there is any amount of pre-tax in the IRA.
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Re: Taxes and rolling over pension lump sum

Post by placeholder »

I think some people forgot about the backdoor roth part of the equation because doing that with six figures of pretax would complicate things so I'd work on avoiding getting that into traditional ira if possible.
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Planner01
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Re: Taxes and rolling over pension lump sum

Post by Planner01 »

placeholder wrote: Sun Apr 11, 2021 5:13 pm I think some people forgot about the backdoor roth part of the equation because doing that with six figures of pretax would complicate things so I'd work on avoiding getting that into traditional ira if possible.
That’s my biggest concern and how much we would have to spend if we have to pay the taxes to convert it to Roth. We are going to find out today if the pension lump sum can be rolled over to the new 401k. The old 401k will stay in place at the old employer (big finance company with great funds).
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Re: Taxes and rolling over pension lump sum

Post by suemarkp »

Can the 401K he's leaving take a rollover after he retires (roll out to IRA, roll IRA into old 401K)? Some can, especially if you like that one and are leaving money in it. You'd think companies offering pension lump sums could offer that as a streamlined rollover capability.

If you have little or no room for back door Roth's after having a large IRA I wouldn't fret. Just put what you would have Rothed in taxable and pick funds that don't churn or produce much in the way of dividends. When it is time to cash out, hope you are in the 0% long term capital gains box and it will effectively be as good as a Roth.
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Planner01
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Re: Taxes and rolling over pension lump sum

Post by Planner01 »

suemarkp wrote: Mon Apr 12, 2021 12:56 pm Can the 401K he's leaving take a rollover after he retires (roll out to IRA, roll IRA into old 401K)? Some can, especially if you like that one and are leaving money in it. You'd think companies offering pension lump sums could offer that as a streamlined rollover capability.

If you have little or no room for back door Roth's after having a large IRA I wouldn't fret. Just put what you would have Rothed in taxable and pick funds that don't churn or produce much in the way of dividends. When it is time to cash out, hope you are in the 0% long term capital gains box and it will effectively be as good as a Roth.
Yes he had a very good 401k plan with his previous employer. We are going to leave it there. We maximize all tax advantage vehicles every year so it’s important that we continue doing the backdoor Roth as he doesn’t have access to the mega backdoor Roth with his new employer.
ExPatKiwi
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Re: Taxes and rolling over pension lump sum

Post by ExPatKiwi »

Planner01 wrote: Sat Apr 10, 2021 5:01 pm DH recently left a long term job and with it there’s a six figure lump sum pension available to him which we have the option of taking as an annuity or rolling it over to an IRA. We want to take the money and put it in an IRA. However.... we do a backdoor Roth IRA every year and having this money in a traditional IRA would complicate things (Pro Rata Rule). Thus, I am thinking we are going to have to pay the taxes to roll it from traditional to Roth so that we can continue to do the backdoor contribution.

Is there another approach we should consider?
If you are both no longer working you won't have earned income to contribute to a tIRA so the backdoor ROTH step won't apply. As others have stated just rollover the pension lump sum into a tIRA and convert a portion each year into the ROTH that keeps you a lower tax band.
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Planner01
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Re: Taxes and rolling over pension lump sum

Post by Planner01 »

ExPatKiwi wrote: Mon Apr 12, 2021 2:09 pm
Planner01 wrote: Sat Apr 10, 2021 5:01 pm DH recently left a long term job and with it there’s a six figure lump sum pension available to him which we have the option of taking as an annuity or rolling it over to an IRA. We want to take the money and put it in an IRA. However.... we do a backdoor Roth IRA every year and having this money in a traditional IRA would complicate things (Pro Rata Rule). Thus, I am thinking we are going to have to pay the taxes to roll it from traditional to Roth so that we can continue to do the backdoor contribution.

Is there another approach we should consider?
If you are both no longer working you won't have earned income to contribute to a tIRA so the backdoor ROTH step won't apply. As others have stated just rollover the pension lump sum into a tIRA and convert a portion each year into the ROTH that keeps you a lower tax band.
We are in our 40s, still working. Hence why we want to continue to aggressively save and invest in all tax advantage platforms, including the backdoor Roth IRA.

If we were to convert the pension lump sum to the Roth IRA every year it will take almost two decades. That’s why we are looking for alternatives. Hoping that the new 401k will accept it.
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