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Can my mother-in-law (not currently employed) transfer a defined benefit plans (from a past employer) in to an IRA/Roth? As she's not working, but my father-in-law is, can they open this jointly so that they he can contribute to it?

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!

May 12, 2013 by David from Miami, FL in  |  Flag
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5 votes

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!

1 Comment   |  Flag   |  May 13, 2013 from River Hills, SC
David

Thanks Pam, I really appreciate the feedback. You're right, there are several options, but you Curt and Michael interpreted this accurately. The options are A) Lump Sum (clearly NOT doing this); B) A specific distribution (basically this is the same as the previous option, so NO); C) Direct rollover in to a Qualified Plan or IRA (YES PLEASE); or D) Annual installment Distribution (NO thank you). We're going to go with option C. There is no mention of leaving the funds there, but I'm not a fan of that option because it's through a really small business and if it goes under in the next ten years, it's likely not worth the trouble of trying to recoup funds (~5k). We'll probably set up via TDAmeritrade so we'll get her set up on there and then send the forms in. Thanks for the great advice!!

Flag |  May 17, 2013 near Miami, FL

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4 votes

David,

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.

Curt

1 Comment   |  Flag   |  May 13, 2013 from Alexandria, VA
David

Thanks Curt, yes it is a cash-benefit plan (she's fully vested), so I don't see any down-side to doing a direct rollover to an IRA. I fully understand the importance of a Direct Rollover vs taking the money out and then depositing it...a big NO NO. I had a feeling there was no way to set up a joint IRA, but great point on the beneficiary aspect of this. I'm going to have them do this so at least he can contribute...thanks!

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Flag |  May 17, 2013 near Miami, FL

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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.

1 Comment   |  Flag   |  May 13, 2013 from Delray Beach, FL
David

Thanks Michael, you're exactly right. There was an option to just transfer the funds directly to an IRA so I had her open up and online trading account and the f
unds should be transferred in a few weeks. Now I just need to make sure she keeps contributing to it. Thanks for the comments, your advice is always spot on!!

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Flag |  Jun 02, 2013 near Miami, FL

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