Tax deferral of pension distribution payments

[cat4ever]

Hello,
I'm receiving a monthly pension distribution payment and would like to defer taxes on it as much as possible as I don't need the money now. Was wondering if there might be any strategy that would defer all taxes on them e.g. like "rolling over" each monthly distribution into an IRA? Barring a rollover approach, could I setup an automatic contribution to my IRA each month based on my maximum allowed yearly contribution, to coincide with each month's distribution? I will turn 59 1/2 on January 31, 2024 if that matters.

Thanks!
Jeff

 

[TheWizard]

Best thing to do, or to have done, is to defer even starting that pension till some later date, thus accruing additional mortality credits and getting a higher monthly payment once you start.

Similar to what we do by delaying SS until age 70...

 

[cathy63]

You cannot rollover pension payments to a tax deferred account such as an IRA.

You can only make new contributions to an IRA if you have earned income in the year of the contribution. If you retired during 2023, you would be able to make a contribution for this year, but it may not be deductible since you had a retirement plan at your employer, so there wouldn't be any tax deferral on the contribution itself, only the future earnings. If you get a new job that doesn't have a pension plan, then you could make deductible IRA contributions in the future.

The only other ways I can think of to defer taxes on these payments depend on the specifics of your pension plan. If there's a possibility to stop receiving payments now and restart at a higher rate later, that would defer the taxes until such time as you restart the payments. Or if there's an option to convert the entire pension to a lump sum, then you could roll that over to an IRA and you wouldn't owe tax until you start withdrawing the money, which could be as late as your RMD age of 75. Whether to do either of these things is a complicated analysis. You might be better off to take the money now and pay the taxes.

 

[cat4ever]

Thanks Cathy, very succinct answer. I'm already retired with no other income so looks like I'm out of luck. And thanks for the note about IRA contributions only allowed if you have earned income, I didn't know that and you probably saved me from some penalties and headaches. Is that a generally known limitation? I'd think it might be a mistake others could easily make if they are receiving SS as well as pension payments.

 

[cathy63]

Thanks Cathy, very succinct answer. I'm already retired with no other income so looks like I'm out of luck. And thanks for the note about IRA contributions only allowed if you have earned income, I didn't know that and you probably saved me from some penalties and headaches. Is that a generally known limitation? I'd think it might be a mistake others could easily make if they are receiving SS as well as pension payments.

I don't know how well known it is but it doesn't seem to come up very often. I had one client at our AARP Tax-Aide site who had made IRA contributions for two years when she was ineligible. The place where she had her taxes done the first year (a CPA!) didn't catch it, but I saw it the second year. I've done well over a thousand tax returns and it's only been that one time, so I'd say it's not very common, though we don't really see a lot of clients who could afford to put money in an IRA after they retire.

If you do your own taxes, TurboTax would definitely alert you and I assume any of the other major programs like H&R Block would too. It's pretty easy to fix if you catch it before you file your tax return. It's only when you find out in subsequent years that it's a real pain.

 

[cat4ever]

ahh, if the tax software programs catch it then I'd probably have been ok. For people with large Roth's and/or with fairly big pensions I could see it as a temptation to keep their tax rate at 12%, as well as for reducing healthcare.gov premiums or even to use to qualify for medicare expansion. especially in the 59-65 age range.