401 K rollover strategy

[lindal00l00]

Activate your spreadsheets everybody!

I retired over a year ago but received a severance on top of immediate activation of my pension. Last year it threw me into a 28% tax bracket (single). With a pension, I am not likely to ever see a 15% bracket and that is without SS). I am 59.

Now I am thinking about rolling my 401 k out of the company sponsored plan and already I have learned a lot. I am trying to figure out 1) whether to take stock, transfer it to a fund before the rollover or transfer it to an IRA (which means I cannot do a NUA transaction.

I have also learned that I can roll over the post tax contributions to a Roth and leave it untouched for 5 years, which I am inclined to do. I am not sure whether the stock will roll or I have to sell it.

So here are some of the percentages - use a round off balance of $1.2 m

Employee Pre-Tax Contribution 44.57%
Employee After-Tax Contribution 18.00%
Company Matching Contribution 37.44%

Stock (roughly 16% of 401k) current value $210,000
cost basis $92,000

I have my spreadsheet set up, and I am thinking of waiting until next year because I think 1) the withdrawal of the stock will send me back up to 28% for this year (and the stock is doing well), 2) I have some small consulting gigs and 3) I have plenty of assets outside the 401k. But the ability to grow 18% of my 401k in a Roth is also enticing. Not sure it offsets the company stock sale. I am also likely to get some proceeds from the sale of property this year.

I would love to have some insight from your experience. I am somewhat surprised by the people who retire before me in the company who don't do this level of analysis and merely unload their stock, so I believe that wisdom is here in the forums! I would love to know the pitfalls and 'what ifs'.

Many thanks!

 

[jebmke]

In 2013 I rolled a 401(k) with both pre-tax and post-tax money. I directed all the post-tax money to a Roth and the rest to a TIra. Before I did this I did some homework because in my state, qualified pension distributions are partially exempt from state income taxes. But if you roll money out of a 401(k) it no longer qualifies for the exemption even though it started out as a qualified plan. But in my case I have a db pension that will absorb the exemption.

 

[bUU]

in my state, qualified pension distributions are partially exempt from state income taxes. But if you roll money out of a 401(k) it no longer qualifies for the exemption even though it started out as a qualified plan.

Which state is that? I wasn't aware of any tax exposure from rolling a (traditional) 401(k) into a (traditional) IRA and I clearly need to come up to speed on that.

 

[Big_Hitter]

can you take the stock in kind?

 

[jebmke]

Which state is that? I wasn't aware of any tax exposure from rolling a (traditional) 401(k) into a (traditional) IRA and I clearly need to come up to speed on that.

Maryland. When you turn 65 you can exclude some of your qualified pension income.

I'm not familiar with other states. The cautionary tale is, make sure you are familiar with the state income tax system in your state. There is a lot of variation. People tend to focus on the Federal.

 

[bUU]

Okay, but what you're saying is that MD taxes qualified-to-qualified rollovers? (Or am I misunderstanding?)

 

[hnzw_rui]

I'm not familiar with other states. The cautionary tale is, make sure you are familiar with the state income tax system in your state. There is a lot of variation. People tend to focus on the Federal.

Aside from SS, pretty sure retirement income (pension, 401k and IRA) is taxable in CA (minus standard/itemized deductions and personal exemptions). I'm considering moving to FL in retirement.

@bUU
From what I understand, qualified to tIRA rollovers are not taxed. However, distributions from from qualified plans may be exempt (at least partially) from tax in MD while distributions from tIRA are not so you lose that exemption when you do a rollover from qualified to tIRA.

 

[pb4uski]

Okay, but what you're saying is that MD taxes qualified-to-qualified rollovers? (Or am I misunderstanding?)

I interpreted what he says as 401k withdrawals being tax-favored but IRA withdrawals being taxed. It is sort of silly but I have heard that is the way that some states do it.

I also understand that in some states that defined pension benefits are tax-preferenced but 401k wihtdrawals are taxed... so if your employer offered a DB pension then you get a tax break but if they didn't and you created your own pension by saving on your own then you don't get a tax break.

 

[bUU]

I tried to find something in the Official Code of Georgia Annotated (specifically O.C.G.A. § 48-7-27 (a) (4) (A) (2014)) that made a distinction between withdrawals from 401(k)s and from IRAs and didn't find anything. The only mention of IRAs (specifically) have to do with referring to the federal deadline for contributions thereto (a reference used presumably to avoid having to amend the regulation each time the federal government changes the date due to placement of weekends).

We do expect to live out the rest of our lives here in Georgia, but of course things could change. I wonder to what extent one should reasonable factor the distinction you noted in Maryland into considerations about rolling a former employer 401(k) into an IRA.

 

[bUU]

I interpreted what he says as 401k withdrawals being tax-favored but IRA withdrawals being taxed.

Okay so it isn't the rollover that is the tax event, but rather the rollover changes the tax impact of the eventual withdrawal. Makes sense. Thanks for the clarification.

 

[lindal00l00]

Okay so it isn't the rollover that is the tax event, but rather the rollover changes the tax impact of the eventual withdrawal. Makes sense. Thanks for the clarification.

Yes, and part of my consideration is that to accomplish Net Unrealized Asset gains, I would take the stock out of the 401k, pay taxes on the cost basis, hold the stock for one year, then sell it - thus paying taxes on the gains. Which appears to be beneficial even if I don't like coming up with the tax payment when I do.

 

[jebmke]

Okay, but what you're saying is that MD taxes qualified-to-qualified rollovers? (Or am I misunderstanding?)

No, what I am saying is that MD has an limited exclusion for pension benefits when you turn 65. You can exclude a portion of your pension payments from your AGI for MD tax purposes. Distributions from a 401(k) are considered qualified pension payments for this purpose.

If you roll your 401(k) to a Traditional IRA and then start taking distributions, these distributions do not get treated as pension benefits even thought the funds started out in a qualified plan.