Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

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DJAlcatraz
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Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by DJAlcatraz »

My 89 year old aunt is receiving a $3000 pension payout from her son. Per federal law, they would tax 20% automatically ($600). She does not pay taxes because she is on Social Security. I spoke to someone who said in that case she would have to fill out a form end of year and she would get that $600 back. She also has the option of Rolling over the $3000 into an IRA. Can she open an IRA now, have that money rolled over into the IRA and then distribute without being taxed? Again, she is 89 years old, she will not have enough income to submit a 1040, so im just trying to save a step or two. If not, then Ill have her just take the payout now and deal with the 20% end of year. Thanks
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CAsage
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by CAsage »

The "form" that one uses to report income and claim a refund is the 1040. Aunt needs to file a tax return unless she can get the withholding stopped, but really ... it's a pretty simple form that would include income, pension, refund amount and where to direct it (mail check or direct deposit). Hopefully a family member or AARP/VITA can help.
I do not believe one can roll over an inherited pension to an IRA. But need more details on why she thought that.
You DEFINITELY cannot rollover the money and then somehow withdraw it without IRS reporting, but that does not mean Aunt will actually owe taxes due to her modest income (SS+pension would mean she does not need to file due to the income but she does need to file to get her proper refund).
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DJAlcatraz
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by DJAlcatraz »

Thank you, I am the family member who is helping her. That all makes sense. I think it is easiest to just get the payout and then fill the form to get the refund back. She is getting one more IRA payout from her son, but it is through fidelity. They asked her to open an account there to transfer it. Ill have to look into that for her, but this sounds like the easiest path.

To your point why she thought she could roll over, according to the form from the Pension company, she had three options. 1) Full Payout minus the 20% withhheld for tax. 2) Roll over to IRA without taking any taxes. 3) Combination of some rollover to IRA and payout. I was thinking can she just roll over to an IRA and then take out without being taxed. But it does get complicated, and Im trying to make it easy for her. Ill make sure i file the form for her end of year.
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by Jack FFR1846 »

Seems like an awful lot of angst over three grand. Let them withhold taxes, then file tax return to get it back. If she or you don't want to do the tax form, go to an H&R Block or the like and let them do it.
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DJAlcatraz
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by DJAlcatraz »

When you are 89 on a fixed income, $600 is a significant amount. I think it was worth an hour of my time to see if I could save her the trouble and months of waiting for that money.
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by GAAP »

DJAlcatraz wrote: Thu May 26, 2022 1:22 pm To your point why she thought she could roll over, according to the form from the Pension company, she had three options. 1) Full Payout minus the 20% withhheld for tax. 2) Roll over to IRA without taking any taxes. 3) Combination of some rollover to IRA and payout. I was thinking can she just roll over to an IRA and then take out without being taxed. But it does get complicated, and Im trying to make it easy for her. Ill make sure i file the form for her end of year.
That is nearly always a one-time choice -- before taking any disbursement from the pension. You'll need to confirm that the option is still available now.
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CAsage
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by CAsage »

DJAlcatraz wrote: Thu May 26, 2022 1:22 pm To your point why she thought she could roll over, according to the form from the Pension company, she had three options. 1) Full Payout minus the 20% withhheld for tax. 2) Roll over to IRA without taking any taxes. 3) Combination of some rollover to IRA and payout. I was thinking can she just roll over to an IRA and then take out without being taxed. But it does get complicated, and Im trying to make it easy for her. Ill make sure i file the form for her end of year.
Aha! With regard to (2), I believe they mean to rollover the Pension account to an Inherited IRA (not an IRA in Aunt's sole name), which is quite common, and then withdraw the funds. The good thing about rolling it over to a brokerage (like Vanguard or Fidelity) is that you would be able to choose optional withholding, and in Aunt's case you could just decline. Withdraw her funds, no withholding.
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DJAlcatraz
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by DJAlcatraz »

This is wonderful, thank you. She actually has a Fidelity Account (inherited IRA) because there was also a small IRA account that was rolled over into that one. If i can roll this over into that same account, then Ill do it. Thank you.
water2357
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by water2357 »

Can you combine inherited traditional IRAs? Usually an inherited IRA has the original owner's name in the title along with the beneficiary's name, e.g. Joe Smith (deceased) IRA for the benefit of Jane Smith beneficiary. And the payout from the inherited IRA can be dependent on the circumstances (age, payment status, etc) of the original owner. Maybe if the original owner of the IRAs was the same person, they can be combined, but if the original owners were different people, I don't think they can be combined.

When you take the money out of the traditional IRA, just make sure that the total amount taken out of all traditional IRAs plus other income (Social Security, etc) doesn't push income up to the point where income tax must be paid. Otherwise, if possible, don't take all the IRA money out in one year, take part of it the following year, etc but make sure you meet any traditional IRA required minimum distribution rules.
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by chemocean »

GAAP wrote: Thu May 26, 2022 3:39 pm
DJAlcatraz wrote: Thu May 26, 2022 1:22 pm To your point why she thought she could roll over, according to the form from the Pension company, she had three options. 1) Full Payout minus the 20% withhheld for tax. 2) Roll over to IRA without taking any taxes. 3) Combination of some rollover to IRA and payout. I was thinking can she just roll over to an IRA and then take out without being taxed. But it does get complicated, and Im trying to make it easy for her. Ill make sure i file the form for her end of year.
That is nearly always a one-time choice -- before taking any disbursement from the pension. You'll need to confirm that the option is still available now.
As mentioned above, I think the $3000 is a distribution and will be taxed. You have not mentioned the advantages of "cashing out" the pension account as cash to an inherited IRA. Usually, keeping a pension is usually financially beneficial to "cashing out" the pension account, regardless whether it is distributed as cash as a taxable event or rolling it over into an inherited IRA. The pension amount of $3000 was probably based on her age and life expectancy, with the Pension company relying on extensive actuarial data. The disadvantages of keeping the pension (annuity) is that her beneficiary will receive no benefits. Be aware that the Pension company is probably encouraging the cash out of the pension account because it probably is to their advantage.

If she rolls over the pension account into an IRA, I think this action would start the ten year rule of the Secure ACT. Or, the withdrawal conditions of the pension were set upon the death of the son (pre-2020, or post-2019). If the son died pre-2020, she might be required to take stretch RMDs based on the account balance of the pension and her age.
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by Alan S. »

A rollover to an inherited IRA must be a direct rollover with no withholding. Any check payable to aunt will be taxable with no indirect rollover possible.

With a direct rollover, it may be possible to direct it to the other inherited IRA, as combining inherited IRAs is OK if both were inherited from the same decedent. However, due to the complexities of the Secure Act which is under proposed Regs not yet final, some detail is needed regarding son. If the inherited IRA RMDs are calculated differently, the accounts cannot be combined.

What was his DOD and age?
Was this a govt pension or private pension?
Topic Author
DJAlcatraz
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by DJAlcatraz »

His date of death was january 2022. He was 67 years old and it was a private pension.
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by GAAP »

DJAlcatraz wrote: Fri May 27, 2022 5:29 pm His date of death was january 2022. He was 67 years old and it was a private pension.
And the $3000 amount is a monthly payment, or a one-time payment? Also, has your grandmother already been paid by the pension, or is this the chance to decide how to handle it?
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water2357
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by water2357 »

Based on the OP stating that there were only 3 options to choose from to receive the payout, I'm guessing this is actually a lump sum death benefit.

For the beneficiary to receive a continuation of the actual monthly pension, the beneficiary would have to have been the spouse (which it wasn't) with a joint & survivor pension or a nonspouse where the deceased had elected a pension with payments guaranteed for a term certain, e.g. 5, 10 or 15 years. If the son had elected a pension with a guaranteed number of years of payments, the beneficiary would normally just start receiving the monthly pension in place of the son for the remainder of the guaranteed number of years. The exception would be if the present value of those remaining payments is valued at less than $5000, then most likely the pension could be paid out as a lump sum.

The other possibility that would cause a lump sum to be paid instead of monthly pension payments is if the son had not yet started receiving his pension and the pension had a death benefit. Death benefits in this situation on pensions to nonspouses are generally paid as lump sums.

These lump sums are determined based on the present value of the future pension payments based on the deceased's age at the time of death, not the beneficiary's age. So, if the deceased was 67 that is the age that will be used. If the death benefit of the pension is truly a one time payout of $3000, the actual monthly pension must not have been very large.

A lot of people have pieces of accrued pensions from several companies, none of which is large, because of changing jobs over a working lifetime. These deferred pension benefits sit there until the person reaches retirement age and claims them.

Don't know what the actual situation is in this case, but seems like the best option, if this is just a lump sum payout of $3000, would be to direct roll it over to its own inherited traditional IRA with no withholding. Then look at the proper rules for withdrawing funds from this particular inherited traditional IRA. If withdrawing all of it at once and adding it to other income still results in zero income tax, maybe that's the way to go. Otherwise, at least the required minimum distribution would need to be withdrawn each year.
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by twh »

Just get the check and deposit it. The $600 withholding will be reported on the 1099-R variant issued by the pension. Granny will get it all back next year when she files her tax return. All these other machinations just aren't worth the effort or potential for errors. Plus, if grandma can really use the $600, she probably doesn't want to leave all the money in an IRA anyway.
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by celia »

DJAlcatraz wrote: Thu May 26, 2022 12:56 pm My 89 year old aunt is receiving a $3000 pension payout from her son. Per federal law, they would tax 20% automatically ($600).
This sounds like her son died and the aunt is the beneficiary. The whole amount of the yearly pension payout will likely be taxed, not just $600 per month. (Call them back if you need to confirm this.) The $600 appears to be tax that is withheld. You can stop the tax withholding by filling out a form for the pension system, but you should first confirm a full year of the pension plus SS plus other incomes will still have her owing no tax for each year. You may also need to check for state income taxes being owed.
She does not pay taxes because she is on Social Security.
Even if she didn't pay tax in the past, she now has more income and may owe taxes. Depending on how much Social Security she has, the pension income could also make some of the Social Security be taxed (up to 85% of it being subject to taxation). Just because she didn't have to pay taxes in the past, that doesn't mean she won't have to pay tax in the future. We just don't have enough information to advise you on the taxes with the given information. If you have tax software, you can run all her numbers for the year though the software to get an estimate of her 2022 taxes, if any.
I spoke to someone who said in that case she would have to fill out a form end of year and she would get that $600 back.
Yes, if her 2022 tax return shows she doesn't owe as much as was withheld during the year, she will get the excess back as a tax refund.
She also has the option of Rolling over the $3000 into an IRA. Can she open an IRA now, have that money rolled over into the IRA and then distribute without being taxed? Again, she is 89 years old, she will not have enough income to submit a 1040, so im just trying to save a step or two. If not, then Ill have her just take the payout now and deal with the 20% end of year.
Don't take shortcuts on this as she could end up underwithheld on her taxes. As was previously mentioned, she likely only had the option of taking a full/partial lump sum before payments started. Now, she is probably better off with a lifetime benefit of $3,000 per month, which cumulatively could be worth more (or less) than the value of the account (ie, the total of all her payments over her remaining lifespan could be more than the lump sum that was offered).

Note that the Inherited IRA also needs to be emptied out within 10 years. After you know how her total income fits in with the tax brackets, she might as well withdraw enough to fill up her current tax bracket each year (whether it is the 0% or 10% tax bracket), else the successor beneficiary might end up paying more in taxes than she does.
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Re: Pension Beneficiary is 89 - can she rollover to IRA and avoid tax?

Post by Alan S. »

DJAlcatraz wrote: Fri May 27, 2022 5:29 pm His date of death was january 2022. He was 67 years old and it was a private pension.
Let's look at the IRA first because the Secure Act will definitely apply to that account. Son passed prior to RBD, and Aunt is an EDB due to not being more than 10 years younger. According to the Secure Act proposed Regs, in addition to LE RMDs starting in 2023 when she will be 90 (2023 divisor 5.7 and therefore the inherited IRA will last 6 years), she could actually opt out of EDB treatment and INTO the 10 year rule. That would provide flexibility in how much to withdraw each year, but flexibility is not simplicity.

The "pension" situation is not at all clear, because we don't know nearly enough of the background info. For example, if son had been collecting a DB pension, then he would be treated as passing AFTER the RBD. Further, DB plans are NOT subject to Secure, so presumably a direct rollover to an inherited IRA would not make the inherited IRA subject to Secure because in this situation an IRA was not inherited, it was just a portability decision.

The term "pension" is not necessarily limited to DB plans, so it is still possible that aunt did not inherit a DB plan and therefore would be subject to the Secure Act rules for deaths prior to RBD. In that case, if aunt opted out of EDB treatment and into the 10 year rule, the inherited private pension could be directly rolled into the same inherited IRA that is being established at Fidelity.

Incidentally, the added complexity of the proposed Secure Act rules is rearing it's head in many different scenarios and explains why both the Spark Institute and the American Benefits Council have filed letter on behalf of their members with the IRS protesting several of their proposed rules. Therefore, relative uncertainty could well roll over into 2023. If the pension is a death benefit and only 3k, I think aunt should take the distribution and avoid all these issues. Hopefully, the IRA is much larger.
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