Lump from city to 457

[rocks911]

Still working on a strategy for retirement.

I work for a city as a firefighter and will be retiring in a couple years. I also have a 457 with Mass Mutual.

Can I take a partial lump sum from the city and deposit it in the Mass Mutual account and have it treated the same as the money I already have in the account?

What I need to do is take the lump and invest it, but also will need to draw on the account monthly to supplement my retirement check from the city. The 457 aspect is important to me as I will be retiring before 59 1/2 and will have to draw on the lump but obviously dont want the penalty.

Thanks for any advice and for being patient with me, this is not my comfort zone to be sure. I suppose it has to do with guidelines... city retirement (TMRS) guidelines, Mass Mutual guidelines, IRS guidelines, etc. but I dont seem to get much help with those institutions as they always distance themselves by indicating they cant give tax advice, so I dont know where else to get info about what my best move would be.

 

[hnzw_rui]

You're going to have to look at your 457 plan documents or ask your provider if you can withdraw partial lump sums.

Alas, no idea what type of account you have with Mass Mutual so be aware that there can be serious tax consequences to moving the funds to your existing account. Mass Mutual will probably be happy to receive your money so they're the most likely to help you with getting things set-up. If your current account with Mass Mutual is after-tax/taxable, then they'll probably need to open a new qualified, tax deferred account so you can transfer funds from your 457 to Mass Mutual without getting hit with a huge tax bill.

 

[bingybear]

You're going to have to look at your 457 plan documents or ask your provider if you can withdraw partial lump sums.

Alas, no idea what type of account you have with Mass Mutual so be aware that there can be serious tax consequences to moving the funds to your existing account. Mass Mutual will probably be happy to receive your money so they're the most likely to help you with getting things set-up. If your current account with Mass Mutual is after-tax/taxable, then they'll probably need to open a new qualified, tax deferred account so you can transfer funds from your 457 to Mass Mutual without getting hit with a huge tax bill.

I read the OP different than you did. Maybe the OP can clarify. Is the 457 with Mass a retirement account (457 type) for your current employer? previous employer?
The partial lump sum you describe taking, is this from a defined benefit pension plan for your employer? Or is this from an other qualified plan? I assumed it was a defined benefit pension plan.

OP - no person of company want's to be responsible for incorrect tax advice. A CPA that gives you advice for a fee is likely a different matter.

 

[nun]

You can usually ask your employer to do the usual tax deferrals to have a lump sum payout for things like unused vacation credited to a retirement account rather than paying it to you as regular income. You just have to comply with IRS contributions rules. So talk to your HR department about this.

Ask your 457 plan administrator about withdrawal options. Mine is invested in mutual funds and I can withdraw any amount at any time without penalty once I leave employment. If your 457 is in Mass Mutual (ie. an insurance company) the structure might be more restrictive. Of course all 457 withdrawals are taxable.

 

[rocks911]

I read the OP different than you did. Maybe the OP can clarify. Is the 457 with Mass a retirement account (457 type) for your current employer? previous employer?
The partial lump sum you describe taking, is this from a defined benefit pension plan for your employer? Or is this from an other qualified plan? I assumed it was a defined benefit pension plan.

OP - no person of company want's to be responsible for incorrect tax advice. A CPA that gives you advice for a fee is likely a different matter.

Sorry about the ambiguity.
My current employer of 29 years (city in Texas) offered the option of deferred comp about 20 years ago through Mass Mutual. It is a 457 account. That is pretax money that comes from my paycheck. I have amassed a tidy sum in that account.
When I retire the city offers various defined benefit retirement plans to choose from . I am opting to take a partial lump sum (equal to 36 monthly payments) in addition to a monthly retirement check. It is the lump sum that I want to deposit in the existing 457.

Clearly I need to talk with my CPA, but I gotta say we seem to talk different languages. Maybe time for a new CPA

 

[hurricane harry]

.

 

[nun]

You should be able to have a portion of that lump sum deposited in the 457 up to the IRS annual contribution limits. But if you don't need the lump sum for immediate spending I would do the calculation to see if it's a good idea to take it rather than a larger pension. Public pensions are often a very good deal. I just did the comparison of my pension vs the chances of an equivalent lump sum if producing the same income if I lived an average lifespan. There was only a 30% chance that the lump sum invested 60/40 would beat the pension....and if course it has no longevity insurance aspect.

 

[hnzw_rui]

Sorry about the ambiguity.
My current employer of 29 years (city in Texas) offered the option of deferred comp about 20 years ago through Mass Mutual. It is a 457 account. That is pretax money that comes from my paycheck. I have amassed a tidy sum in that account.
When I retire the city offers various defined benefit retirement plans to choose from . I am opting to take a partial lump sum (equal to 36 monthly payments) in addition to a monthly retirement check. It is the lump sum that I want to deposit in the existing 457.

Clearly I need to talk with my CPA, but I gotta say we seem to talk different languages. Maybe time for a new CPA

Ah, so partial lump sum from pension then? And you want to move it to your 457?

I'm actually not sure about the rules for this. Specifically for our plan documents, 401(k) funds rolled over to 457 is treated differently than funds that were originally in the 457 account. The rolled over 401(k) funds are subject to early withdrawal penalties while the 457 monies are not so the administrator has to keep them separate. Dunno if it's the same for other 457 plans or if it's specific to ours.

Not sure what the tax treatment is for roll overs from a 401(a) defined benefit plan. You definitely want to do a direct rollover from the DB plan to your 457 or you might be hit with mandatory withholding taxes. I highly suggest you schedule a meeting with whomever is handling your 457.

As nun has mentioned though, public pensions tend to be pretty good deals. I actually plan on buying a larger pension by transferring funds from my 457 account into the pension plan. I certainly have no plans of doing the reverse.

 

[utrecht]

Why would you want to take money from the pension and move it to the 457? The only reason I can think of to do that is if the pension fund is in trouble.

 

[nun]

Why would you want to take money from the pension and move it to the 457? The only reason I can think of to do that is if the pension fund is in trouble.

Ahh....I mis understood, I thought the lump sum was regular income. If it's from the pension whether it can go into the 457 depends on the type of pension. If it's a defined benefit the rollover probably can't be done to a defined contribution plan. This is a question for your HR department.

 

[hnzw_rui]

Ahh....I mis understood, I thought the lump sum was regular income. If it's from the pension whether it can go into the 457 depends on the type of pension. If it's a defined benefit the rollover probably can't be done to a defined contribution plan. This is a question for your HR department.

It depends on the plan administrator whether they allow it or not but there seems to be no ruling against it per IRS. I was looking at the incoming transfer/rollover form for our 457 plan and there's a check box for a direct rollover from qualified 401(a) defined benefit plan.

 

[nun]

It depends on the plan administrator whether they allow it or not but there seems to be no ruling against it per IRS. I was looking at the incoming transfer/rollover form for our 457 plan and there's a check box for a direct rollover from qualified 401(a) defined benefit plan.

Yes you are right, it's all in the rules. Last year I got a lump sum from a defined benefit plan and just rolled it over to my IRA. Still taking money from a 401a DB plan and putting it into a 457 sounds like it might be a bad long term decision. I can see doing it for cash flow reasons, but I'd want to know the terms of the 401a pension before saying if it's a good idea or not.

 

[hnzw_rui]

Still taking money from a 401a DB plan and putting it into a 457 sounds like it might be a bad long term decision.

If the pension fund is healthy, yeah, I'm inclined to agree.

We're actually allowed to contribute up to $53,000 after-tax per year (adjusted per 415(d)) in a voluntary supplemental annuity program. If the restrictions weren't so onerous, I would be contributing to this over taxable investments in order to avoid tax drag. Alas, I think I'd rather keep the flexibility of being able to choose my own investments and will just transfer funds from the 457 or use the taxable account to purchase a larger pension.

 

[nun]

If the pension fund is healthy, yeah, I'm inclined to agree.

We're actually allowed to contribute up to $53,000 after-tax per year (adjusted per 415(d)) in a voluntary supplemental annuity program. If the restrictions weren't so onerous, I would be contributing to this over taxable investments in order to avoid tax drag. Alas, I think I'd rather keep the flexibility of being able to choose my own investments and will just transfer funds from the 457 or use the taxable account to purchase a larger pension.

I just used 401a DC money to buy into a 401a DB plan. I also had the option of using 457 and 403b money, but I didn't want to give up the flexibility of the 457 with it's no penalty withdrawals before 59.5. I worked for a state university and had 401a, 457 and 403b, so got to defer a lot.

 

[hnzw_rui]

I just used 401a DC money to buy into a 401a DB plan. I also had the option of using 457 and 403b money, but I didn't want to give up the flexibility of the 457 with it's no penalty withdrawals before 59.5. I worked for a state university and had 401a, 457 and 403b, so got to defer a lot.

Yeah, 457 is great. Really very flexible.

Honestly, it's probably a good thing I don't have additional options for tax deferred accounts or I'll probably end up facing hefty RMDs even if I do Roth conversions to the top of the 25% bracket. The Roth IRA is a no-brainer because tIRA is non-deductible for me.

 

[nun]

Yeah, 457 is great. Really very flexible.

Honestly, it's probably a good thing I don't have additional options for tax deferred accounts or I'll probably end up facing hefty RMDs even if I do Roth conversions to the top of the 25% bracket. The Roth IRA is a no-brainer because tIRA is non-deductible for me.

I've got a lot of tax deferred....401a, 403b, 457, IRA and ROTH, but at least I converted $280k of the 401a DC money to a DB plan that starts paying at age 55 so that's nicely spread out. My income needs are low and I'll be able to do at least $10k of annual IRA to ROTH conversions up to the top of the 15% tax bracket as well.

 

[Morgan22]

Sorry about the ambiguity.
My current employer of 29 years (city in Texas) offered the option of deferred comp about 20 years ago through Mass Mutual. It is a 457 account. That is pretax money that comes from my paycheck. I have amassed a tidy sum in that account.
When I retire the city offers various defined benefit retirement plans to choose from . I am opting to take a partial lump sum (equal to 36 monthly payments) in addition to a monthly retirement check. It is the lump sum that I want to deposit in the existing 457.

Clearly I need to talk with my CPA, but I gotta say we seem to talk different languages. Maybe time for a new CPA

My State's 457 plan will accept roll overs (401k, IRA, etc.) into the plan. But it is kept separate and not treated like money directly contributed to the 457. Meaning you cannot withdraw the roll over money without penalty prior to 59.5 like you can the direct contributions (and earnings from those direct contributions). (I think this is what you are wondering.). So there is no advantage to you rolling directly into the 457. You might as well roll into an IRA. And use 72t if you need the money prior to 59.5.
But you need to read your plan summary documents to see if your plan has the same rule.

 

[rocks911]

Why would you want to take money from the pension and move it to the 457? The only reason I can think of to do that is if the pension fund is in trouble.

A couple reasons:

1. There is no guarantee of a COLA down the road. As a matter of fact a retiree I spoke with said he hasnt gotten any COLA in the nearly 14 years hes been retired. Obviously his money now has lost about 40+% of its purchasing power. And it wont get any better for him, only worse.

2. I think I can do better than never getting a raise.

3. The Presiding Officer of the pension just appointed by Governor Abbott is Josh McGee. He is a crusader to change pensions across the nation. He scares me.
Enron billionaire frets about public pensions' solvency - POLITICO

 

[utrecht]

No COLA could be a good reason, but I wouldnt worry about reason #3. I also have a government pension in Texas which was recently sued over a proposed change to benefits (too long a story to get into right now). Based on the outcome I can tell you that Texas pension benefits are as close to bullet proof as possible.

PS...I find the 2 words "Enron billionaire" to be pretty ironic

 

[pb4uski]

Why not roll the lump sum from your city pension into an IRA? You'll have more investment options, possibly lower fees and can control it.

 

[nun]

You need to do the numbers. What is your age, the pension amount, gender, is it single of joint life and what is the lump sum? With those you can work out an IRR and assess that chances that you can do better investing it yourself. FYI I just bought into a State pension because I calculated only a 30% chance of a 60/40 portfolio providing the the income of the pension out to age 82.....my expected life span.

 

[rocks911]

Why not roll the lump sum from your city pension into an IRA? You'll have more investment options, possibly lower fees and can control it.

This is most probably what I'll do. The no COLA thing is a deal breaker for me. A friend on my fire dept (BBA from SMU) said that the money would be taxed when withdrawn from TMRS (Texas retirement system) and moved to an IRA. If that is right thats nearly a deal breaker....sheeeeesh its so hard to know what to do.

 

[hnzw_rui]

This is most probably what I'll do. The no COLA thing is a deal breaker for me. A friend on my fire dept (BBA from SMU) said that the money would be taxed when withdrawn from TMRS (Texas retirement system) and moved to an IRA. If that is right thats nearly a deal breaker....sheeeeesh its so hard to know what to do.

It likely depends on how the rollover is processed.

If you do a direct custodian to custodian transfer/rollover, there's no withholding tax.

Otherwise, for an indirect rollover (you receive the check, cash it, then you send the funds to your IRA custodian within 60 days) it's mandatory 20% withholding. That doesn't mean that's your tax bill. Just means you need to cough up the remaining 20% from taxable or other accounts and then you just get the withholding amount refunded to you at tax filing.

 

[pb4uski]

......A friend on my fire dept (BBA from SMU) said that the money would be taxed when withdrawn from TMRS (Texas retirement system) and moved to an IRA. If that is right thats nearly a deal breaker....sheeeeesh its so hard to know what to do.

That doesn't sound right. Usually, money transferred from a pension plan to an IRA is not a taxable event. Clearest to do a custodian to custodian transfer. But can also have a check from the plan made out to "[your IRA custodian] for the benefit of [rocks911]" and then you relay the check to the IRA custodian for deposit into your IRA account... no withholding.