Pension to Roth
Hi – I have a client who is a Delta Pilot, in 2007 when delta was going through bankruptcy he was forced to withdraw his pension and that amount was taxed as it was grossed up into his W-2.
He is wanting to create a ROTH IRA account and wants to know if the monies he is contributing will be taxable eventhough he has already paid taxes on this amount, and if there is a limit as to how much he can contribute?
Thank you ~ ED
Permalink Submitted by Alan Spross on Fri, 2009-01-16 04:46
If he has earned income but not so much AGI that he is not eligible to contribute, he can make regular Roth IRA contributions which are always after tax. Therefore, he will not get a deduction, but once the account is qualified, all distributions will be tax free.
For 2008 he could contribute 5,000 plus another 1,000 in catch up contributions if he has reached age 50.
The pension treatment does not sound right as a forced distribution. This may have been some other severance related settlement. Pension benefits should have been eligible for rollover.
Permalink Submitted by Catherine Wynne on Wed, 2009-04-08 20:58
RE: question from Emily on the Delta pilot pension settlement:
The good news is that Delta Airline pilot can indeed roll these funds into a Roth as a result of special legislation relating to these airline bankruptcy settlements. The details are:
[u]P.L. 110-458 – “Worker, Retiree, and Employer Recovery Act of 2008[/u] covers, not just the RMD exemption but also, within Section 125, exemption from the income restrictions on Roth IRA rollovers. Section 125 states “If a qualified airline employee receives any airline payment amount and transfers any portion of such amount to a Roth IRA within 180 days of receipt of such amount (or, if later, within 180 days of the date of the enactment of this Act), then such amount (to the extent so transferred) shall be treated as a qualified rollover contribution described in section 408A(e) of the Internal Revenue Code of 1986, and [b]the limitations described in section 408A(c)(3) of such Code shall not apply to any such transfer[/b]”.
Referencing the date of enactment of the law, the qualified airline employee has until June 19th, 2009 to roll funds into a Roth IRA. If a settlement was received after 12/23/2008, they will be allowed 180 days from the date of receipt of the settlement to convert the funds to a Roth IRA. Only the taxable portion of the settlement (there were other lump sum settlements with different tax treatment) may be rolled into the Roth IRA.
This is an incredible gift to the airlines employees. Once past the deadlines outlined above, the opportunity expires.
Catherine Wynne