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I have a DB plan that pays me approx 2800 per mth. If I dont need, could I rollover the mthly benefits into a Roth IRA?

Apr 06, 2014 by Joe from Poughkeepsie, NY in  |  Flag
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6 votes
Peter C. Karp Level 20

Hello Joe,

Larry brought up some good points in his response. It would be helpful to know if you are currently receiving your monthly pension benefits which means you have already made your distribution election or if you are just trying to plan for the future. If you are currently receiving payments you would need to check with your plan’s administrator to determine if you can even change your payout at this point. If you are questioning future payments then it may be possible to convert to a Roth IRA but keep in mind there would be tax ramifications and depending upon your adjusted gross income you may not even qualify for a Roth IRA. I would recommend that you speak to your tax advisor to determine the best options for your specific situation. We are also available to assist you in exploring your options, just give us a call.

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Comment   |  Flag   |  Apr 11, 2014 from San Francisco, CA

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3 votes

Hello Joe,

If you're already receiving $2,800 per month in pension benefits, then you would've made a pension payout election (i.e. pay for your life, pay for joint life with spouse, etc). The election is typically intended to be a permanent, unchangeable choice. You could check with the pension administrator to see if they allow subsequent change of mind and actuarial recalculation of a lump sum benefit, but I think this would be unusual.

On the other hand, if you're referring to a future $2,800 per month pension benefit that you haven't yet started receiving, then yes, you should be able to convert the benefit to a Roth IRA. But this would be done on a lump sum basis, not a monthly conversion basis. And of course, you'd be subject to income tax on the converted amount. If the tax bite is too big in one year, the entire DB pension lump sum could be directly rolled to an IRA, and then initiate Roth IRA conversions from there over several years in more manageable tax bites.

One other thought . . . if you're already receiving the $2,800 per month pension, you can't roll that to a Roth IRA. But if you (or a spouse) have earned income and your total income does not exceed eligiblity limits, then apart from your pension you can still contribute after-tax money to a Roth IRA (both you and a spouse, if any). The contribution limit is $5,500 of earned income per individual under age 50, and $6,500 of earned income for those over age 50. Eligibility to contribute to a Roth IRA phases out between $114,000 to $129,000 for single filers, and $181,000 to $191,000 to married filing jointly.

Hope that helps. All the best!

1 Comment   |  Flag   |  Apr 06, 2014 from Clackamas, OR

Thanks. I thought that was the case. My Proseries tax software (Intuit) kinda leaves that open?? I will clarify with them so they don;t mislead users....

Flag |  Apr 06, 2014 near Poughkeepsie, NY

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2 votes

Social Security, a Defined Benefit Pension Plan and a Commercial Annuity (Single Premium Immediate Annuity) are all contracts. One is a social contract, another is an employer contract and finally a commercial contract. Technically and legally, the assets are owned by an entity other than the beneficiary; in other words, a trust. An advantage to any form of legal contractual income is it's asset protection feature when it comes to Medicaid and Long-Term Care expense. If you are married, will you take a single life distribution or provide for a survivor benefit? If you are married you might want to check the Medicaid asset recovery laws in your state, including the income and asset qualifications. Sure, rolling money into an investment from a DB plan sounds great on many levels, but life throws curve balls and the cost of cognitive impairment care is not cheap. At $10,000 +/- per month, many will see a meltdown of assets pretty quickly. Death for a married couple both receiving Social Security means a hair cut in income regardless who goes first and the DB distribution plan may also be rather substantial. When investable assets are down to the $120,000 range, it can get a little thin for a surviving spouse with many years ahead. When a DB plan has a survivor benefit, income thresholds may be such that payment for the confined spouse is required when assets are melted down to a particular level, but upon the death of the institutionalized spouse, the continuing income via the DB plan will continue at full value. It all has to do with a simple concept of "incidents of ownership".

Comment   |  Flag   |  Apr 08, 2014 from Ocala, FL

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2 votes
Jim Hyre, CFP® Level 7

Hi Joe,

This is a great question!

If you have already started to receive the monthly benefit, it’s unlikely that you can reverse your decision. If however, you are weighing your choices prior to making this election, then yes, you should be able to convert the benefit into a Roth IRA as a lum sum. To do this, you would first need to roll the lump sum benefit into an IRA. Next, you would need to do a conversion of the IRA into a Roth IRA. This can be done all at once, or over several years, to better manage the income tax implications. The conversion from an IRA to a Roth is a taxable event. You might want to speak with your tax accountant to develop a plan for the conversion to a Roth.

If however you are already receiving your monthly benefit check, but don’t need to currently spend it, you could potentially invest it into a Roth IRA for you (and your wife if married) assuming you meet the criteria for Roth IRA contributions.

Anyone who has earned income (including a spouse if you file joint returns) can contribute to a Roth IRA, keeping in mind adjusted gross income limits for eligibility and contribution limits (currently $5,500 per individual under age 50 and $6,500 if over age 50).

The adjusted gross income requirement starts to reduce the amount you can contribute between $114,000 and $129,000 for single filers and $181,000 to $191,000 for married filing jointly.

If you have followup questions, I’d be happy to help.

Take Care!

Comment   |  Flag   |  Apr 15, 2014 from Columbus, OH

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