Withdrawing pension options..IRA?

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marc21490
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Withdrawing pension options..IRA?

Post by marc21490 »

I am in the process of leaving my current job (teaching in NJ, I am not vested) by the end of this year to return to school full time. By that time, I will have a little over 30k in pension contributions. Given that I will be attending school full time for atleast 1.5 years, I will not have a "IRA sponsorship" by an employer. I am aware that I need to put the money into an IRA within 60days of withdrawal to avoid penalty; I want to avoid the penalty at all costs. What are my best options?

I currently have a ROTH IRA that I max out yearly. From what I read, I cannot move my pension to my ROTH IRA.
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retired@50
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Re: Withdrawing pension options..IRA?

Post by retired@50 »

marc21490 wrote: Tue Jun 22, 2021 8:11 am What are my best options?
I'd suggest sending a message to user "lakpr". As I recall, he or his wife is a NJ teacher, so he'll probably be familiar with any rules in that program.

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samsoes
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Re: Withdrawing pension options..IRA?

Post by samsoes »

If a trustee-to-trustee transfer is done, the 60-day window doesn't apply.

In such a case, the funds are usually electronically transferred directly from the old trustee to the new. If a check is issued instead, it would be made payable to <new trustee> FBO <your name>.

(FBO = For the Benefit Of)

For example: "Fidelity Investments FBO John Doe"

(Check with the new trustee on exactly how to phrase their company name.)
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fposte
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Re: Withdrawing pension options..IRA?

Post by fposte »

You shouldn't need any kind of employer sponsorship; you just open a traditional IRA wherever you like and roll the lump sum into it. It could be at the same institution as your Roth IRA if you like that place. You should be able to do conversions to Roth from that IRA down the line if you choose, too.
lakpr
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Re: Withdrawing pension options..IRA?

Post by lakpr »

Thanks retired@50 for mentioning me. I am in IT / finance industry, not a teacher; but my wife is a NJ school teacher, yes.

We had this scenario, my wife took a 4 year break from work to raise our kids after about 3 years of service, and not vested. According to the rules, NJ will allow the pension contributions to be left within the TPAF (Teachers Pension and Annuity Fund) up to 3 years after leaving the teaching job. There is no compulsion to roll it out to an IRA at this time.

At the end of three year period though, TPAF does send you a note to roll the money out within 60 days, if you have not returned to teaching within that 3 year period. If you did return to teaching, it is as if you just continued from where you left off.

In my wife's case, we had to roll it out to an IRA at the end of 3 year period, then when she returned to teaching again, she bought back the service credits for the period she taught earlier. It cost us something like $800 extra than what she had put in / rolled out, but that price was acceptable to us since it means she would vest in the pension 3 years earlier than beginning afresh ....

============

That said, a big disclaimer. This was our personal experience at least a decade ago. My wife's service was 2001-2005, then she got back to working in 2009. There have been changes to the way teachers' pensions are calculated, vesting rules etc. under Christie administration, and therefore I am not intricately familiar with the rules. Please do your diligence, but I do think the 3-year period still exists. It was meant as a way for teachers, who are mostly female, to take time out for child rearing (exactly the situation we had) and yet come back to teaching without jeopardizing their careers and pensions.
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retiredjg
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Re: Withdrawing pension options..IRA?

Post by retiredjg »

marc21490 wrote: Tue Jun 22, 2021 8:11 am I am aware that I need to put the money into an IRA within 60days of withdrawal to avoid penalty; I want to avoid the penalty at all costs. What are my best options?
This sounds like the wrong way to do this. You do not want to do a 60 day rollover because they will withhold federal taxes.

You want either a trustee to trustee rollover or a direct rollover. I think direct rollover is the most common procedure. They send you a check made out to your IRA FBO your name (FBO = for the benefit of). You then forward that check (do not deposit it) to your IRA.

This will avoid the withholding.
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ResearchMed
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Re: Withdrawing pension options..IRA?

Post by ResearchMed »

retiredjg wrote: Tue Jun 22, 2021 9:22 am
marc21490 wrote: Tue Jun 22, 2021 8:11 am I am aware that I need to put the money into an IRA within 60days of withdrawal to avoid penalty; I want to avoid the penalty at all costs. What are my best options?
This sounds like the wrong way to do this. You do not want to do a 60 day rollover because they will withhold federal taxes.

You want either a trustee to trustee rollover or a direct rollover. I think direct rollover is the most common procedure. They send you a check made out to your IRA FBO your name (FBO = for the benefit of). You then forward that check (do not deposit it) to your IRA.

This will avoid the withholding.

IRA to IRA, you can take the money from IRA-1 and put it back in IRA-2 within 60 days, no penaty. The downsides are that this can only be done once per year, per person, and you *must* not miss that 60-day deadline.

But from an Employer type plan, only using the trustee-to-trustee/direct method allows all of the money to be moved, due to the mandatory tax withholding.

However, you *can* add that money back in at the same time, from other monies you have, to top it off to that same amount to preserve the tax-deferred space.
You'll get that money "back" when you file taxes, as that amount will have already been paid, but there will have been no tax liability matching it (if you made the transfer within the 60 days, etc.).

Depending upon the amount of the transfer and thus the taxes withheld, this may or may not be convenient, given the amount of available cash one has on hand.

RM
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Topic Author
marc21490
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Re: Withdrawing pension options..IRA?

Post by marc21490 »

Thank you all for the responses. It sounds like it is possible to avoid any withholding (which is my main goal in all of this). I have my ROTH IRA with Vanguard and am happy with them so I will reach out to them and explore my options.
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