Good Evening,

I have a client who is 60 years old and participated in an employer’s defined benefit pension plan since 1989. He does not have any IRAs. The employer terminated his pension 12/31/13, and is set to pay them out their benefits on 8/1/14. In this pension, the employee was required to put a percentage of their after-tax pay into the pension as per their union collective bargaining agreement, and had specific benefits at retirement age. Since the employer is terminating their pension before retirement, they are eligible for a lump-sum cash out. The company started a 401k plan on 1/1/14 after terminating the pension, and my client is eligible to participate with immediate vesting because of his service time.

Here are their pension options, and they can take a combination of each:
1. (Total taxable amount) Lump sum payment
a. taxable portion paid directly to me less 20% Fed W/H
b. Transferred directly to my company 401k plan
c. taxable portion transferred directly to an IRA or eligible employer plan

2. (Total Non-taxable amount) Lump Sum Payment
a. Non-taxable portion paid directly to me
b. transferred directly to my company 401k plan
c. Non-taxable portion transferred directly to an IRA or eligible employer plan

The client would desire some of his non-taxable money to be paid to him in cash, and the balance to be rolled into a Roth IRA. The client would like the total taxable amount to be rolled into a TIRA.

My concern is that some of the purportedly “non-taxable” amounts this Pension TPA states they can move to an “IRA”, if directly moved/rolled into a Roth IRA, are going to bear with them a 1099-R stating that they were not all “non-taxable” after all, and will end up having to show them as taxable conversions (up to the amount of his pre-tax money) on his federal tax return. Also, how does the IRS order the first dollars to be moved out — are they growth, or pre-tax dollars, and how are we to rectify this with the fact that both sides (pre- and post-tax) are being done at the same time? Finally, why do they even offer the option of moving any of the after-tax pension money into a 401k, I thought a 401k can’t accept after-tax rollover $?

I think that based on other things I have read here, that the best way to accomplish this is to 1. roll all of the amounts into a TIRA, 2. roll the pre-tax amounts into his 401k, 3. withdraw the lump sum he wants from his TIRA (but from his basis so no big deal), then 4. convert the balance of the TIRA to a Roth IRA.

But this would be a lot harder than just having the TPA just cut three checks and crossing fingers to hope that they are spreading out the after-and pre-tax monies the way they state in the document. Is it okay to proceed this way?

Can anyone comment? Thank you in advance!