Rollover of Pension to Roth IRA

Submitted by Annette Evans on Tue, 2016-08-16 20:56

I previously worked for a company that has just offered a limited – time pension opportunity for me to receive a distribution of my entire vested pension benefit in the form of a single lump sum. I am 58 years old and not yet retired and I am interested in doing a direct roll over to a Roth IRA.

I have been doing research on my own, but I want to identify a very trusted and reliable organization with long proven track record and reputation to set the Roth IRA with.

Can you provide information and/or recommendations for what my next steps would be at this point to find the right organization and set this up before my deadline to accept this opportunity?

I’m happy about this development but fearful at the same time, because this money was hard earned and I do not want do this the wrong way.



Submitted by Alan - IRA critic on Tue, 2016-08-16 23:43

  • It would probably not be wise to roll a large amount to a Roth IRA in the same year, particularly if you are still working and have salary income as well. You would pay too high a tax rate. It would be better to to a direct rollover to a traditional IRA and then convert small incremental amounts, perhaps after you retire and before you start SS benefits. Your tax rate during that period will be as low as it ever will be in most cases, and that is when it is best to convert to a Roth.
  • A large firm by Schwab, Vanguard, or Fidelity is probably your best bet because they all have low expense investment options. All 3 will help you order the direct rollover. If you live in a large city, one of more of these firms may also have a branch office there. I would stay away from banks and insurance companies unless you have a specific reason to use them. You will pay higher fees and expenses with banks and insurance companies. An exception might be a bank CD, but you would not want to put the entire amount in a CD.
  • Perhaps the former employer has a form to be filled out that you can provide to the new firm. It works best to request the rollover through the new IRA custodian.
  • Lately, there have been cases reported of companies overpaying when calculating lump sum distributions. If they overpay and ask for the money back, it will cause you a ton of problems, so you might ask them to double check their calculations before releasing the direct rollover check. They should make out the check to your IRA custodian FBO you to qualify for a direct rollover and avoid withholding. But they may mail the check to you for you to deliver to the new firm.
  • Remember, what you want is a direct rollover, not a distribution. That avoids withholding. Again, for any amount you want transferred to a Roth IRA, you will be taxed on that amount. But not for a direct rollover to a traditional IRA.

Submitted by Annette Evans on Wed, 2016-08-17 01:01

Thank you for your reply, it is very helpful.  A point of clarification, I am not yet retired but I am not working as I am on permanent disability and am not receiving a salary income. How does this affect the potential tax rate?

Submitted by Alan - IRA critic on Wed, 2016-08-17 01:31

If your disability is taxable, it will affect your marginal tax rate. If it is SS disability income a Roth conversion can make a portion up to 85% of that income taxable, whereas none of it may be taxable otherwise. Of course, your disability income is probably considerably less than you would be making if you were working. The less total taxable income you have the lower your marginal rate will be, and lower rates result in a lower bar for conversions to be beneficial.

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