401(a) Defined Benefit Plan

[Tykimeister]

I'm a state employee and I contribute 6% of my income to a 401(a) defined benefit plan. I have been doing this for 7 years now. I have been thinking about starting a different career path, maybe even moving to a different state, etc.

Since I am vested, what is the smart thing to do with the 401(a) if I am vested? I could leave the money there, let it grow, and get a retirement benefit when I am eligible. But reading on their website, my contribution only grows at 4% interest. Wouldn't I be better off rolling it into my IRA?

My IRA is a roth, so I don't know how that will affect rolling the 401(a) into it, since I haven't paid taxes on the 401(a). Would it be worth it to pay the taxes on the 401(a) and rolling it over into my roth IRA. Or maybe its not even possible? Or is just leave the 401(a) where it is now a better option but I don't know why?

My roth IRA is all S&P500 Vanguard Admiral Shares
I'm 30 years old.

Thanks!

 

[DrRoy]

The tax free compounding power of a Roth is quite valuable. I would only leave the 401a as it is if you really like an investment option there that you cannot get elsewhere. Is the 4% guaranteed? Would it rise in the future? It is not a bad fixed income return these days. Also consider if you prefer the convenience of reducing the number of institutions that you have to deal with to manage your money. You could ask Vanguard about the rollover if that is what you want.

 

[pb4uski]

While 4% interest with no interest rate risk and negligible credit risk is quite good, at 30 years old growth would be more valuable to you. If your 401(a) is 20% or less of the total (401(a) and Roth IRA combined) you might keep it as a fixed income alternative.

You should not transfer it to your Roth IRA as that would make the amount you transfer taxable income and you would have to pay taxes on it and it would likely cost you a lot unless you are in a low tax bracket.

You could transfer it to a new taxable IRA with no tax implications. You would need to establish a new IRA (not a Roth) with either the same or a different provider.. then transfer the 401(a) to that new IRA and invest it in mutual funds of your choice (presumably a S&P 500 or total stock index fund).

 

[musher]

Another consideration is whether continued participation in the defined benefit plan carries additional benefits like access to subsidized health care, etc. Also note that vesting schedules for additional benefits may be different than the vesting schedule for employer contributions.

These benefits may be worth more than the income you forego by remaining invested in the account.

If this is a defined benefit plan, I believe a more informative analysis would be comparison of the expected benefit to the future value of the cash value invested outside the plan.

If your plan is like my plan, the mandatory interest is only important in the case where you eventually take the lump sum. The benefit payment is a function of salary and years of service. It is somewhat independent of the cash value of your account.

If your plan is an annuitization of the cash value at retirement, the mandatory interest becomes a more significant issue.

 

[nun]

How is your benefit calculated? It's usually base on your salary and number of years of service. The 4% growth might be referring to the amount that your pension grows for each year that you defer taking it.

 

[Texas Proud]

How is your benefit calculated? It's usually base on your salary and number of years of service. The 4% growth might be referring to the amount that your pension grows for each year that you defer taking it.

Just read this thread... and agree with this... in a way...

It could be the growth of your 'investment' if you want to take it as a lump sum... however, the plans that I have looked at for friends and family are terrible cash balance compared to the defined benefit...

Do a PV on your future benefit and compare to the cash value to make a decision....

 

[nun]

Just read this thread... and agree with this... in a way...

It could be the growth of your 'investment' if you want to take it as a lump sum... however, the plans that I have looked at for friends and family are terrible cash balance compared to the defined benefit...

Do a PV on your future benefit and compare to the cash value to make a decision....

Yes, with a 401a DB plan you don't see a cash value unless there is some lump sum buy out being offered and that's usually a limited time offer. I would advise the OP to get a pension projection...most states have online calculators for that where you'll enter some average salary, years of service, pension start date and single/joint lifetime etc and you get an estimate.