Pension plan rollover question

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Pension plan rollover question

Postby bdougherty » Tue Dec 18, 2012 7:45 am

Hello I'm new to your forumn so please forgive any stupid questions I may ask. :-)

Okay so I changed job a few months back. I'm 36. I have a pension with my former employer which I need to make a decision about.
If I leave it with them they estimate $400 a month when age 65.
The rollover amount is 15k if I take it.
Leaving to age 65 is questionable b/c other companies in this industry have started buying out pensions and rumor has it that its a matter of time until they buy everyone out.

Point 1-So my thoughts are to roll to a RothIRA. The modeling I have done shows that to be a good option.

Point 2-So from the reading I've done it looks like you cannot roll right to a roth but rather to a basic IRA and then you can roll the max (4k?) per year into the roth.

So can some provide thoughts

Point 1 - Is this generally a good idea?
Point 2 - Is this the correct process?

Other option I havent mentioned that are good ones?

Thanks for your assistance

Bichon Frise
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Re: Pension plan rollover question

Postby Bichon Frise » Tue Dec 18, 2012 8:36 am

quick aside, many pension plans, mine included, only pay out the annuity if the monthly payment is more than $X,000 (so check with your plan). So, you may end up with a lump sum at age 65 anyway if you just let it ride.

Point 1 - Insufficient information. Many "hard" numbers go into the calculation of if a Roth is "good" for you or not. And this based on assumptions. Also, many "soft" things should be taken into account, like all your other accounts, how crazy you are, your goals etc.

Point 2 - Correct. Incorrect. You would first have to rollover to a "traditional" IRA account, as this is all pre-tax money. You then can convert that amount, the sky is the limit (actually, it is usually the amount you are willing to pay in taxes). You can convert the whole $15k to Roth, but you will have to pay taxes at your marginal tax rate to get it in there. There are some other little nuances like the pro-rata rule, but that usually only bothers people doing a non-deductible IRA to Roth conversion.
Bichon Frise

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Re: Pension plan rollover question

Postby DoingHomework » Tue Dec 18, 2012 9:21 am

I'm just going to throw some math at you first:

When you are 65 your life expectancy will be about 20 years. So your $400 a month is worth the following depending on the interest rates in effect at the time:

0% $96,000
2% $78,487
4% $65,234
6% $55,056
8% $47,127
10% $40,865
12% $35,853

Pensions are usually calculated assuming returns of 8-10% so I'll assume your annuity will be worth about $45,000 when you turn 65. That's what you will need in order to buy a similar annuity at that time. I'm not suggesting you do that but if you chose to, that's about how much money you'd need.

If you take your $15000 and invest it now, what would you need to earn to have $45,000 in 29 years when you turn 65? That also depends on the interest rate you can get. Let's assume you take the least risky approach and buy a single 30 year US treasury bond (zero coupon) that you hold to maturity (meaning you wait until you are 66). You can buy such a bond today that pays an interest rate of about 2.75%. That would only allow your $15000 to grow to $34,000 when you are 65, less than the value of your pension.

But your pension is at least somewhat at risk. A lot can happen to the company in the next 30 years. So comparing to the risk-free rate may not make sense. If you could get as little as 3.75% over the next 30 year on your $15,000 you would do better than the pension. I think that is entirely possible.

So, in my opinion, rolling your pension into an IRA makes sense. I'm not sure I'd do it into a Roth though. You would be choosing to pay taxes today, which is certain, rather than deferring taxes until later. Again, a lot can happen over the next 30 years. You'd be kicking yourself if you pay the taxes now and Congress implements some sort of tax holiday any time in the next 30 years. I don't expect it but then, in the late 70s, no one expected 3% mortgages, very low inflation, and low tax rates either. You might also have a year when you make very little income and can do this later at a lower tax rate. Basically, why lock in current tax conditions unless you expect them to get much worse with no chance of being better anytime in the next 30 years? I wouldn't. I'd stick with the traditional IRA and defer taxes for now.

But, as BF said, it's all about your assumptions and what you expect of the future.

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