Company shutting down Pension plan...

[MrMut]

Hi all,

 

My company has recently announced that it is shutting down our Pension plan due to the cost of it (not shocking). I'm going to have around $15k in it (I'm under 30 y/o) and I'm not sure what to do with it. They haven't listed the official options yet, but i believe some of the options will be to roll it into my 401k, put it into an IRA, have a check cut (with taxes removed), etc...

 

• 
   
  
• I currently put 10% of my income into my 401k. 3.5% company match.
  
• I currently have a solid years worth of money in savings for a rainy day.
  
• No debt, car is paid off with low miles on it, live below my means, etc...
  

 

I was thinking of getting a check cut and enjoying half the money (vacation or buy a few toys) and putting the other half in savings. I already put a good amount of $$ into 401k (although, I'm not maxing the ~$15k/year limit), so not sure if that would be the best fit for it.

 

What do you think? Ideas/suggestions? Thanks!

[JetTeach]

Roll it over and avoid the hit on taxes.

[Seabee]

If you take a check for half, you'll pay taxes and penalty on that amount. I'd roll it into an IRA myself, because you generally have more investment options there than in a 401k. If you're really set on taking some of the money out, you may be better off rolling the pension into your 401k, then reducing your contribution into the 401k. You'd get the money over time, but you'd avoid the penalty. Just have to make sure to continue contributing enough to max the employer match.

[MrMut]

If you're really set on taking some of the money out, you may be better off rolling the pension into your 401k, then reducing your contribution into the 401k. You'd get the money over time, but you'd avoid the penalty. Just have to make sure to continue contributing enough to max the employer match.

 

That's actually a very good idea. Put all the money into the 401k and then temporarily reduce my contribution (not below company match though). I save myself the tax hit and still come out with some money to spend. Thanks for the great suggestion!!

[hegemony]

I would roll it into an IRA not the 401K so that you are not limited in the investment options.

 

I would also not take money out just out of principle to avoid paying the penalty.

[breeze]

Convert to a Roth IRA before they decide to do something with 401k's.

[radi8]

Convert to a Roth IRA before they decide to do something with 401k's.

 

Nice thing about a Roth is that future withdrawals are tax-free. You pay when you earn the money today, at today's rates....which are both historically very low and not likely to remain that way.

Obviously it's not all that simple, but everything else being equal I'm betting on future tax rates being much higher. Just something to consider.

[MrMut]

Thanks so much for the advice everyone! It is really helpful and much appreciated!

 

Just out of curiosity, isn't the "usual" advice to max out your 401k for the year before you put money into a roth ira?

[Seabee]

Thanks so much for the advice everyone! It is really helpful and much appreciated!

 

Just out of curiosity, isn't the "usual" advice to max out your 401k for the year before you put money into a roth ira?

 

I usually see:

1: 401k to maximize employer match

2: Max out the IRA (Roth or Traditional, depending on which you believe is better for you)

3: Max out the 401k

[hegemony]

not everyone can contribute to a roth so like most things it is YMMV

[athensgaguy]

not everyone can contribute to a roth so like most things it is YMMV

Everyone can contribute post-tax to a traditional and roll that over to a Roth.

[hegemony]

not everyone can contribute to a roth so like most things it is YMMV

Everyone can contribute post-tax to a traditional and roll that over to a Roth.

correct, but only 5K a year and since the funds are non-qualified the only real benefit of the roth is not having the forced distribution at age 70.5. I like my roth 403B better. up to 16.5K a year (currently though I split it and put 15K in pre-tax 403B and only $1500 in the roth 403B). I've been thinking about increasing the roth portion since I also put 16.5K in my 457 and also have a "forced" retirement account (401a/414h) but no social security.

[athensgaguy]

not everyone can contribute to a roth so like most things it is YMMV

Everyone can contribute post-tax to a traditional and roll that over to a Roth.

correct, but only 5K a year and since the funds are non-qualified the only real benefit of the roth is not having the forced distribution at age 70.5. I like my roth 403B better. up to 16.5K a year (currently though I split it and put 15K in pre-tax 403B and only $1500 in the roth 403B). I've been thinking about increasing the roth portion since I also put 16.5K in my 457 and also have a "forced" retirement account (401a/414h) but no social security.

When you make a distribution from a traditional IRA, you'll be taxed on earnings whereas from the Roth IRA the earnings can be withdrawn tax-free assuming you meet withdrawal requirements for age and seasoning.

 

Your overall limit is $10K since you can make contributions for you and your spouse. The Roth IRA may be better than the Roth 403( up to the limit since you may have more investment options with a regular brokerage firm holding your IRA.

[hegemony]

not everyone can contribute to a roth so like most things it is YMMV

Everyone can contribute post-tax to a traditional and roll that over to a Roth.

correct, but only 5K a year and since the funds are non-qualified the only real benefit of the roth is not having the forced distribution at age 70.5. I like my roth 403B better. up to 16.5K a year (currently though I split it and put 15K in pre-tax 403B and only $1500 in the roth 403B). I've been thinking about increasing the roth portion since I also put 16.5K in my 457 and also have a "forced" retirement account (401a/414h) but no social security.

When you make a distribution from a traditional IRA, you'll be taxed on earnings whereas from the Roth IRA the earnings can be withdrawn tax-free assuming you meet withdrawal requirements for age and seasoning.

 

Your overall limit is $10K since you can make contributions for you and your spouse. The Roth IRA may be better than the Roth 403( up to the limit since you may have more investment options with a regular brokerage firm holding your IRA.

 

the roth 403b and trad. IRA contributions right now are taxed at the highest marginal rate. you're correct about the investment options under the roth IRA, but I am mostly pleased with the 403b options. I can even pick closed funds like the contra-fund if I want:

 

 

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[MrMut]

We received our full official options today:

 

1. 
    
   
2. Roll over into company 401k
   
3. Roll over into an IRA (traditional or Roth)
   
4. Annuity
   
5. Cashing out
   

 

My only options are really #1 or 2. I'm under 30, so #3 is useless to me at the moment. #4 requires a nearly 35% hit once taxes/penalties are figuring into the equation. Not worth it...

 

Thinking about an IRA so i can take the money out whenever and not be hit too hard... I was hoping to add this $$ into my rainy day savings account, but that's not going to happen.

[rgw]

We received our full official options today:

 

1. Roll over into company 401k
2. Roll over into an IRA (traditional or Roth)
3. Annuity
4. Cashing out

 

My only options are really #1 or 2. I'm under 30, so #3 is useless to me at the moment. #4 requires a nearly 35% hit once taxes/penalties are figuring into the equation. Not worth it...

 

Thinking about an IRA so i can take the money out whenever and not be hit too hard... I was hoping to add this $$ into my rainy day savings account, but that's not going to happen.

 

Hmmmm. Whose annuity and what are the terms? I assume it is a fixed guaranteed annuity and not a variable? You'd have to be very careful and get some competing bids outside the plan for comparison ... you can roll a distribution to an annuity inside an IRA. Some of the new GMIB variable plans are worth a look but ONLY if you are over 45 (they will not sell one to a younger person). I have taken SOME of my retirement assets and wrapped a couple different variable annuities with a minimum guaranteed payout (floor but no ceiling) around them.

 

I would go for a rollover into a Self-Direct IRA .... that would give you the most flexibility. MAKE SURE you initiate the new IRA account FIRST then have the new IRA administrator go get the assets directly from your company plan. You don't want to cause anything thats looks like a withdrawal ... TRANSFER is the name of the game!

 

One thing ... does your 401k offer a "loan" option? The only reason I ask is that if you roll the assets into the 401k you could potentially increase your borrowing capacity in the plan. Not that I am suggesting borrowing for anything other than a disastrous emergency but it is a consideration .....

 

As for your rainy day savings account ... you COULD roll the money to an IRA then convert to a ROTH and pay the tax due now. The remaining amount would be the principal deposit into your new ROTH IRA and as such could be accessed anytime tax free if needed. (Rainy day savings doubling as retirement savings if it never rains) You have to do the math on the tax issue. I forget if you can still split the conversion tax over two years ... not sure.

 

Don't forget also .. in any IRA you may indeed take early withdrawals without penalty before age 59 1/2 IF said withdrawals are equal amounts each month/quarter/year. You will pay the income tax due but no penalty.

[Jen23514]

We received our full official options today:

 

1. 
    
   
2. Roll over into company 401k
   
3. Roll over into an IRA (traditional or Roth)
   
4. Annuity
   
5. Cashing out
   

 

My only options are really #1 or 2. I'm under 30, so #3 is useless to me at the moment. #4 requires a nearly 35% hit once taxes/penalties are figuring into the equation. Not worth it...

 

Thinking about an IRA so i can take the money out whenever and not be hit too hard... I was hoping to add this $$ into my rainy day savings account, but that's not going to happen.

 

This statement worries me honestly.

 

Put that money where you can't get to it (like your 401k), and work on upping your savings other ways so you have your rainy day fund and never have to touch this money.