How to invest without paying tax.

Captaindano

Dryer sheet wannabe
Joined
Jul 1, 2024
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Vriginia
Hello all,

Was hoping to get some advice on how and or what to invest my pension check into. I will be enrolling soon to start drawing my pension check of $1,344.00 a month for 7 years. I've been told by the pension service that I will need to pay tax on this amount yearly to which I do understand. Total will be $16,128.00 a year. I believe I can roll the monthly check into a traditional IRA and then pay tax on the money when I make draws. I don't plan on touching this for at least 10 years. But as I understand I can only put up to $7,500.00 a year into the IRA. Am seeking advice if anyone knew of any other investments that I could invest this money for 7 years in without paying tax as I receive the monthly amounts?

I'm a worker not an investor so that's why I'm here hoping for some advice.

Thanks.
 
Only if you have earned income can you contribute to an IRA (a pension is not considered earned income). Outisde an IRA you can invest in BRKB, which pays no dividends, so does not generate taxable income unless you sell some at a gain.
 
You can only contribute to an IRA if you have wage income that exceeds the amount you contribute - so you can do that for 2024 since it sounds like you have worked this year, but not after this year if you are about to retire. The maximum you can contribute finally went up this year - if you are 50+, it is now $8,000 ($7,000 if you are under 50). If you are married, your spouse can contribute to their own, separate, IRA, even without working, subject to their own age based limit and as long as your wages exceed the sum of the IRA contributions that the two of you make.

So if you are married, over 50, and have at least $16,000 in wage income this year, both you and your spouse can contribute $8,000 to their respective IRAs.
 
Pensions are not rollover eligible. If you have earned (W-2 or self-employed) income you can contribute to a tIRA or Roth. Does this pension greatly change your tax bracket? What changes in your life will happen if you pay the tax on this money and move on?

I've said it before in previous posts and will say it again, don't let taxes wag the dog. Don't waste precious time on something that may be of little consequence.
 
OP, before we go much further, what is your marginal tax bracket before the pension income or after the pension income? If it's only 10% or 12%, then it isn't worth fretting about and may even be detrimental depending on the amount of other retirement income once you retire.

But if we assume that it is something worth doing, what you receive will be income and you're looking for ways to mitigate the income for your taxes. While you can't roll it into an IRA, if you and your DW don't already contribute to an IRA and could contribute to an IRA and deduct your contributions then the deductible contributions would partially offset your pension income. Alternatively, if you or your DW qualify for a 401k through your work you could increase your 401k contributions.

Of if your health insurance is HSA eligible then you could make HSA contributions and those would be deductible and offset the income.
 
Yes, I am still working full time and will be for at least 10 more years. This pension came from a former employer that I was laid off from in 2009. At that time, I received paperwork stating at 62 I would draw $1080.00 at 62 yrs. old. However, the paperwork fine print said it would reduce in years to come for blah, blah, blah reasons. I didn't know much about it at the time so I just said oh well I will look into it when the time comes. Now the time has come, and my options are $403.00 a month for me and or survivor (wife) until the last passes or $1344.00 a month from 55-62 yrs. of age for just me. I know what $403 after taxes (about $300) will buy in 10-20 yrs. so that is why I'm taking the $1344.00 before taxes hoping to turn it into something.

Apologize for the long statement. It seems like what I have gathered so far, I have no options but to take the monthly pension checks as they come and pay the tax due. I'm very fortunate to have a nest egg savings and a good 401k in the making. Sounds like I should pay the tax and put the net in a high yield savings or collect the checks and put the net in my savings and then open an IRA for each, me and the wife. Then transfer the net pension divided into an IRA between the two of us.
 
Yes, I am still working full time and will be for at least 10 more years. This pension came from a former employer that I was laid off from in 2009. At that time, I received paperwork stating at 62 I would draw $1080.00 at 62 yrs. old. However, the paperwork fine print said it would reduce in years to come for blah, blah, blah reasons. I didn't know much about it at the time so I just said oh well I will look into it when the time comes. Now the time has come, and my options are $403.00 a month for me and or survivor (wife) until the last passes or $1344.00 a month from 55-62 yrs. of age for just me. I know what $403 after taxes (about $300) will buy in 10-20 yrs. so that is why I'm taking the $1344.00 before taxes hoping to turn it into something.

Apologize for the long statement. It seems like what I have gathered so far, I have no options but to take the monthly pension checks as they come and pay the tax due. I'm very fortunate to have a nest egg savings and a good 401k in the making. Sounds like I should pay the tax and put the net in a high yield savings or collect the checks and put the net in my savings and then open an IRA for each, me and the wife. Then transfer the net pension divided into an IRA between the two of us.

Yep, & buy a 10 year term policy of at least $100,000 to protect your spouse for if you die before age 62.
 
You will have to pay tax on the pension checks. Use that money to pay monthly expenses.

Since you have income to support Roth IRA contributions, you could use W-2 income to contibute to a Roth IRA account for yourself and spouse.

Roughly speaking, you'll have enough excess W-2 income to make 7 years of contibutions to Roth-IRA.

You would want to compare the benefits and rules of Roth-IRA vs. Traditional IRA to see which make sense for you.
 
We took a pension buyout and were able to roll the entire amount to the tIRA. Have you considered doing that? Obviously, we'll be paying taxes as we WD but we invested and have control over how much we WD until RMDs.
 
Pensions are not rollover eligible. If you have earned (W-2 or self-employed) income you can contribute to a tIRA or Roth. Does this pension greatly change your tax bracket? What changes in your life will happen if you pay the tax on this money and move on?

I've said it before in previous posts and will say it again, don't let taxes wag the dog. Don't waste precious time on something that may be of little consequence.
I thought you could take a lump sum and roll that into an ira with many pensions plans, no?
 
Pensions are not rollover eligible. If you have earned (W-2 or self-employed) income you can contribute to a tIRA or Roth. Does this pension greatly change your tax bracket? What changes in your life will happen if you pay the tax on this money and move on?

I've said it before in previous posts and will say it again, don't let taxes wag the dog. Don't waste precious time on something that may be of little consequence.
I wonder how I got 2 of mine rolled over:confused:

I still have one that I have not but it is an option that they present to me when they send out their statement..
 
I thought you could take a lump sum and roll that into an ira with many pensions plans, no?
You can, I did - the OP hasn’t said whether lump sum is an option?
 
The OP has indicated that a lump sum is NOT an option.

So therefore a rollover into an IRA is not an option.
 
I thought you could take a lump sum and roll that into an ira with many pensions plans, no?
OP does not show a lump sum option available in his choices.
 
How about if I just increased my 401k deduction percentage to the gross amount of the Retirment pension ($1344x12>$16,128 yr.) Then used the $1344 monthly to replace my normal pay. I might save enough on my gross income, before tax deductions, to offset the tax from the Retirment pension.
 
How about if I just increased my 401k deduction percentage to the gross amount of the Retirment pension ($1344x12>$16,128 yr.) Then used the $1344 monthly to replace my normal pay. I might save enough on my gross income, before tax deductions, to offset the tax from the Retirment pension.
That's fine. You are still going to pay the tax, just later once you start 401k withdrawals. For the time being, you will have the same amount of monthly income, but will be saving additional $16k/year in your 401k; assuming you are not having any 401k contributions currently. IRS allows you to save up to $23k in your 401k for 2024.
 
Pensions are not rollover eligible. If you have earned (W-2 or self-employed) income you can contribute to a tIRA or Roth. Does this pension greatly change your tax bracket? What changes in your life will happen if you pay the tax on this money and move on?

I've said it before in previous posts and will say it again, don't let taxes wag the dog. Don't waste precious time on something that may be of little consequence.
You can roll over a lump sum pension into a TIRA.
 
Hello all,

Was hoping to get some advice on how and or what to invest my pension check into. I will be enrolling soon to start drawing my pension check of $1,344.00 a month for 7 years. I've been told by the pension service that I will need to pay tax on this amount yearly to which I do understand. Total will be $16,128.00 a year. I believe I can roll the monthly check into a traditional IRA and then pay tax on the money when I make draws. I don't plan on touching this for at least 10 years. But as I understand I can only put up to $7,500.00 a year into the IRA. Am seeking advice if anyone knew of any other investments that I could invest this money for 7 years in without paying tax as I receive the monthly amounts?

I'm a worker not an investor so that's why I'm here hoping for some advice.

Thanks.
There are any number of companies that you can invest in that do not pay dividends to shareholders; all growth is regarded as growth of principal, no gain is recognized unless and until you sell shares, and there is a step-up if you pass the shares to your loved ones. One famous one is Berkshire Hathaway.
 
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