Terminated pension plan. What are my options?

Submitted by Steph Lo on Sun, 2019-03-10 04:32

Plan: eventually convert into a Roth IRA.
The plan allows 2 options: a)lump sum roll over or b) annuity (several options)
My idea is to do a lump sum roll over into a new TIRA and then convert it into a Roth.
Questions:
1. Are there any caveats on the roll over? I’m assuming that opening an IRA is acceptable for this purpose regardless of income limits or existing employer 403b.
2. Are there special rules for such a roll over when I want to convert it into a Roth afterwards?
3. Do you have suggestions on where I should open an IRA for this purpose? (list of factors to consider and questions to ask)
4. What is the impact (tax and other costs) of converting this roll over TIRA into a Roth?

Separate questions on “non-deductible” IRA:
1. To open a “non-deductible” IRA, I open a regular TIRA and file a form 8606. Do I have to file the 8606 concurrently with the opening of the account or is that done at tax filing (later)?
2. If I want to keep adding funds (yearly per limits) into this Roth IRA, can I simply open a new non-deductible TIRA and then have that amount converted into the existing Roth IRA or will it have to be allocated to a “new” Roth IRA account?
Thanks.



Submitted by Alan - IRA critic on Sun, 2019-03-10 17:00

  1. Yes, there are no income limits or restrictions regarding a direct rollover to an IRA.
  2. You can convert to a Roth IRA anytime, but unless the rollover is small, you probably would want to do the conversion in annual increments to avoid spiking your marginal rate due to conversion income.
  3. The largest and most competitive custodians are Schwab, Fidelity, and Vanguard. Stay away from banks. If you want CDs, you can buy brokerage CDs in an IRA brokerage account at any of the 3 firms named.
  4. If you have any after tax amounts in the plan, please advise. Otherwise, the amount converted will be fully taxable in the same manner as if you earned the converted amount as wages. Doing too large a conversion may cause your rate to rise. If that rate is higher than you expect to pay in retirement, the conversion is not likely to be beneficial. For conversions, the rule of thumb is they are beneficial if the rate paid is less than what you expect to pay in retirement, and not beneficial if you pay more. If the rate is expected to be about equal, it depends. Determining the rate on the conversion is easy, but projecting the average rate in retirement is challenging and depends on many factors.
  5. If you make a non deductible TIRA contribution, you file the 8606 when you file your taxes for that year. If you qualify for a regular Roth IRA contribution (income limits), the Roth is always preferable to a non deductible TIRA contribution.
  6. You can convert into an existing Roth IRA account, but if you have to use the “back door” method (non deductible TIRA contribution, the conversion), your conversion will be mostly taxable if you have a non Roth pre tax IRA balance in any such IRA. Under your plan, the rollover IRA will be pre tax until it is entirely converted. If you want to do annual back door Roths because you do not qualify for regular Roth IRA contributions, you may want to consider rolling the old plan into your current 403b, but only if that plan has good investment options and low expenses. If you were going to convert taxable amounts anyway, then it does not matter if your back door conversion is also taxable. You would just make the ND contribution and then convert as much as you wish, and a pro rated amount of the conversion will be non taxable as calculated on Form 8606.
  7. Yet another possibility is to convert directly from your old plan to your Roth IRA, and that eliminates having the pre tax IRA balance, making your back door Roth conversions tax free. However, your old plan may not allow you to do annual partial conversions. You would have to ask the plan administrator.

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