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URL:  http://boards.fool.com/my-wife-and-i-are-both-public-teachers-in-ca-in-30272954.aspx

Subject:  Re: Rollover OUT of Roth, INTO State Pension Pla Date:  9/20/2012  9:55 AM
Author:  aj485 Number:  70926 of 76082

My wife and I are both public teachers in CA, in our mid-40's and decided that our Roth IRA funds would be better invested by purchasing service credit toward our CA State Teacher's Retirement system plan. It will cost about $140k to purchase the maximum years between the two of us.
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The $140k we need to pay for service credits will translate to just under $200k if we get hit with the 10% penalty on the full distribution and have the capital gains from the distribution added as ordinary income to our year's salary.


Have you included the future tax consequences of the pension income in this calculation? Even assuming the current tax rates will stay the same, at a Federal marginal rate of 25% and a CA marginal rate of 9.3%, you will be paying nearly 35% in taxes on the additional income your credits will buy you, compared to no taxes on money from the Roth. If you were to retire this year, and start taking Substantially Equal Periodic Payments out this year, based on only a 2.5% interest rate (here's a calculator http://www.bankrate.com/calculators/retirement/72-t-distribu... ), you would be required to take out a minimum of $4,415 and you could take out up to $8,068 tax free. That would mean that the additional credits would have to buy you between $5,929 and $10,835 in additional income starting this year. If you are going to wait to start drawing on your retirement past this year, then you would need to what the $200k would grow to when you plan on starting to draw your taxable pension income.

And I would say that the two big assumptions here are - the tax rates will stay the same, and CA will be able to honor their pension commitments.

Because traditional IRA's can be rolled into a pension plan, but not mentioned in rules regarding Roth IRA, I have to believe this distinction the result of an oversight in the creation and subsequent modification of Roth IRA regulations.

Actually, I don't think it is an oversight. The penalties were put in place to limit the uses that tax-free money can be put to. Buying into a taxable pension plan was probably not thought to be a potentially prudent use, and therefore, the penalties were meant to apply.

AJ
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