Nephew getting pension disbursement at 45

[Thomasbob]

My nephew was told they are ending pe signs. Options are cash out, annuity, 401k dump, nd Roth ira. My opinion is Roth ira as he doesn't need the cash or bump to the highest tax level am I giving him the best advice? Married, kids are out of high school (one just graduated), wife grooms dogs and he is a hydraulic engineer making 150+. Advice?

 

[Texas Proud]

Not sure what you are asking.... do you mean pension?

ROTH is not a good option if it is what I think as that is a taxable event.. same with cash out...

 

[EastWest Gal]

ROTH is the same as a cash out-huge taxable event. I would roll it over into an IRA or 401K. With an IRA, one can do ROTH conversions slowly, avoiding the highest tax brackets.

 

[Thomasbob]

Pension is ending with his company, my suggestion is a Roth IRA which is a non tax option, earnings above the initial deposit (pension conversion) would be tax free, pension deposit would be taxable later if and when he converted or withdrew, correct? The only other tax free now would be a dump into hig 401k. Correct me if I'm wrong...

 

[Thomasbob]

He an start conversions from the Roth ira (initial investment) after 55.5 years, correct? Taxable event at that point or whenever (initial deposit only).

 

[RetiredHappy]

Clear as mud. ROTH IRA "deposit" is always after tax. Taking as ROTH IRA means he will need to pay tax on the full amount. Tax deferred would be 401K.

 

[SevenUp]

Pension is ending with his company, my suggestion is a Roth IRA which is a non tax option, earnings above the initial deposit (pension conversion) would be tax free, pension deposit would be taxable later if and when he converted or withdrew, correct? The only other tax free now would be a dump into hig 401k. Correct me if I'm wrong...

If the pension amount is rolled over to a Roth IRA in 2025, tax will be due on the TY2025 tax return for the entire amount of the rollover. Unless this is a very low amount, it would likely be taxed at a much higher rate than if it would be withdrawn or converted over many (at least, several) years.

See the General guidelines for choosing between traditional and Roth.

Why not roll it into the 401k? There may be good reasons, but...?

 

[SevenUp]

He an start conversions from the Roth ira (initial investment) after 55.5 years, correct? Taxable event at that point or whenever (initial deposit only).

Careful of wording. One doesn't "convert from" Roth. One may "withdraw from" (aka "take a distribution from") Roth, and the Treatment of those distributions is shown in the chart at that link.

 

[RetiredHappy]

Careful of wording. One doesn't "convert from" Roth. One may "withdraw from" (aka "take a distribution from") Roth, and the Treatment of those distributions is shown in the chart at that link.

I think he is confusing ROTH with IRA/401K.

 

[Thomasbob]

Thx 7up, did not know pension to Roth ira was taxable. So his only non-taxable option is pension to 401k. Bummer...

 

[SevenUp]

Thx 7up, did not know pension to Roth ira was taxable. So his only non-taxable option is pension to 401k. Bummer...

If it sounds too good to be true....

See https://www.irs.gov/pub/irs-tege/rollover_chart.pdf for a more official source that says a rollover from a defined benefit plan (aka pension) must be included in income if it goes into a Roth account.

 

[bada bing]

Most likely, he'll want to roll it into his 401K or into a tIRA. You didn't mention tIRA as an option, but it almost certainly is.

There are a couple of somewhat uncommon issues that might apply to him. The first is to investigate how good of a deal the annuity offering is. It will depend on if his pension is structured as a cash balance or defined benefit. If it's defined benefit (the most common type), then what he'll be offered is just a replacement annuity for the benefit he has vested. If it's a cash balance plan, there is a chance the annuity offered to him might be a better deal than available retail. If he was inclined to consider the annuity, that would be a factor in that choice's favor. Unlikely, but not impossible.

The second issue that might influence his choice of tIRA or 401K rollover is if he (they) earn over the MFJ limit for direct Roth contributions ($236K in 2025 for MFJ) and they have cleared all traditional IRA balances without basis. They would have done this to make backdoor Roth contributions. Uncommon, but possible. If that is their situation, or may be their situation in the future, then rolling into the 401K is the right choice. Otherwise, all else being equal, rolling into a tIRA at their favorite brokerage is probably the best bet.

 

[Koolau]

Thx 7up, did not know pension to Roth ira was taxable. So his only non-taxable option is pension to 401k. Bummer...

But on the bright side, placing the funds in a 401(k) delays any taxable event until he choses to take the money out - which likely will be after retirement when taxable income will decrease.

Also, at that point, he can slowly convert to tIRAs and then to Roths based on how much tax he wants to pay.

It's all good!

 

[pb4uski]

Pension is ending with his company, my suggestion is a Roth IRA which is a non tax option, earnings above the initial deposit (pension conversion) would be tax free, pension deposit would be taxable later if and when he converted or withdrew, correct? The only other tax free now would be a dump into hig 401k. Correct me if I'm wrong...

As others have indicated, I think you are wrong and if he chose the Roth option he would be taxed on the whole deposit in 2025.