My mother-in-law received a letter from an ex-employer that she has 5k in a defined benefit plan and she needs to take an action. I don't want her to withdraw the funds and take the 20% penalty, but I think she should be able to convert it to an IRA/Roth (via TDA, Charles Schwab, eTrade, etc.) right? Can you let me know if you foresee any problems with this? - She is 58 - She left her job 3+ years ago - She is currently unemployed (likely not to be employed for the foreseeable future) - Neither she, not my FIL have retirement accounts (I know how bad this is, I pester them all the time)
Any advice would be appreciated, thanks!
Hi David! Be sure to read the letter she received carefully. It should outline the options for what she can do with the money. Depending on the disposition of the plan, she may have the option to leave the funds there, cash out the account, or move the funds to another account, such as an IRA or Roth. Also, contact the HR department for her previous employer. They should have further details on what she is allowed to do. If you decide to move the funds to a new account, be sure that it is done as a direct transfer to the new custodian.
I agree with Curt - it's never to late to start saving, so encourage her to do so!
Your question has two parts, I'll answer the second first. Your in-laws cannot have a joint retirement account (nor can anyone else). That does not stop either of them from starting a Traditional or Roth IRA as long as the family unit has "earned" income. There may be limits on how much they can contribute or to which type of account (Roth or Traditional) depending on their Adjusted Gross Income and Earned Income. Generally speaking, they each could contribute up to $6,500 per year since they are older than 50. They can name each other as beneficiaries which might get the results you were looking for from a "joint" account.
As to the first question, it is a little harder to say. Here is what the Department of Labor says, "If you are in a defined benefit plan (other than a cash balance plan ), you most likely will be required to leave the benefits with the retirement plan until you become eligible to receive them. As a result, it is very important that you update your personal information with the plan administrator regularly and keep current on any changes in your former employer’s ownership or address." DOL goes on to say, "If you are in a cash balance plan, you probably will have the option of transferring at least a portion of your account balance to an individual retirement account or to a new employer’s plan." So if your mother in-law's defined benefit plan is a cash benefit plan she MAY be able to transfer it to an IRA.
While you are correct that your in-laws are late to the game for retirement savings, it is never too late to start.
Hope this helps.
David, the short answer is that defined benefit plans have rules distinctive to the plan that dictate when and if, you can make a lump sum distribution. The really, really, good news is that the plan is advising your mother-in-law that she needs to take action. So long as one of those actions is to roll it into an IRA, she should do so.
She should follow the instructions on the letter, or if she has questions,call the sender of the letter. It is most likely the plan administrator.
She does not want a check written to her; that would be a taxable event. Rather, she would open an IRA, or Roth IRA, and then have the monies either sent directly to the new plan, or to you written to the custodian of the new plan. It sounds like it is getting complex, but as you start completing forms, you will see the options I am talking about, and it will flow into place.
As you may be aware, if you open a Roth, you will have to pay taxes on that money as taxable income. As she is unemployed, it could be very little, or possibly no additional tax. If the father-in-law is earning income and they file jointly, that needs to be considered for taxation purposes.
She cannot open a 'joint' IRA, but they can both open separate ones. The father-in-law, can however, contribute to a 'spousal' IRA with proceeds from his income even though she has no income.