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Author: wwallberg One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120805  
Subject: Employer converting pension plan Date: 9/16/2005 12:11 PM
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Hi,

I'm hoping someone can point me to the applicable IRS pubs or answer directly some questions I've got concerning a change in my employers pension plan.

I've been enrolled in the employers plan since 1987 - a defined benefit 'profit sharing' plan. It's the type of plan that causes a check box on my year end W2 and caps eligibility for a TIRA at an income level under my annual salary. However my salary also falls short of the max income levels for a Roth and that's what I've been contributing to.

Effective 9/30/2005 the employer is closing the defined benefit plan and starting a 401K effective 10/1/05. We will be allowed to roll our accumulated pension benefits to the 401K or move them into a self directed TIRA.

My question: Will the change to a 401k enable me to consider making contributions to a traditional IRA instead of my Roth? Are there income caps for a TIRA with the 401k like there were with the defined benefit plan?

Thanks in advance,

Wayne
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80728 of 120805
Subject: Re: Employer converting pension plan Date: 9/16/2005 12:34 PM
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I've been enrolled in the employers plan since 1987 - a defined benefit 'profit sharing' plan.

Let's be careful, here. "Defined Benefit" and "Profit Sharing" are terms of art for two different kinds of retirement plans. From reading ahead, I suspect you have a Defined Benefit plan, but I'm not certain.

It's the type of plan that causes a check box on my year end W2 and caps eligibility for a TIRA at an income level under my annual salary.

Pretty much any kind of employer sponsored pension plan is going to do that.

However my salary also falls short of the max income levels for a Roth and that's what I've been contributing to.

Good.

Effective 9/30/2005 the employer is closing the defined benefit plan and starting a 401K effective 10/1/05. We will be allowed to roll our accumulated pension benefits to the 401K or move them into a self directed TIRA.

OK. You didn't ask, but I usually recommend taking the option to roll over into an IRA. You'll have more investment choices, and never have to worry about your employer mishandling those funds.

My question: Will the change to a 401k enable me to consider making contributions to a traditional IRA instead of my Roth?

Sorry, but no. It doesn't matter what kind of retirement plan your employer sponsors (defined benefit, profit sharing, money purchase, SEP, SIMPLE, 401k, and probably a couple of others I've missed). ANY plan sponsored by your employer will put that lower limit on your ability to deduct contributions to a traditional IRA.

Are there income caps for a TIRA with the 401k like there were with the defined benefit plan?

Yep. Exactly the same caps.

--Peter

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Author: wwallberg One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80732 of 120805
Subject: Re: Employer converting pension plan Date: 9/16/2005 3:55 PM
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Peter:

Thank you for the quick response. So my IRA options don't change. Probably for the better. From all the reading I've done, not having to decide whether the Roth vs. Traditional will serve me better in retirement might be an advantage.

As an aside, I am waiting to see what investment vehicles are available with the company 401k before making my decision on the rollover. However I am leaning toward moving it into a new self directed IRA of my own.

Again, thank you.

Wayne

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 80733 of 120805
Subject: Re: Employer converting pension plan Date: 9/16/2005 4:48 PM
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As an aside, I am waiting to see what investment vehicles are available with the company 401k before making my decision on the rollover. However I am leaning toward moving it into a new self directed IRA of my own.

Whatever investment vehicles they have available in the 401k, you'll have the same vehicles available in your IRA and more. (With perhaps the exception of some mediocre performing institutional mutual funds.)

On the plus side for the rollover into an IRA, you can also retain the option of converting part or all of the traditional IRA into your Roth. That gives you the ability to manage your taxable income to some extent.

For example, let's say you have some kind of medical problem that causes you to take a leave of absence for some time. Your income drops significantly because of this. With the money in the 401k, you're pretty much stuck - you've got to leave it there as you haven't terminated your employment. With the money in a traditional IRA, you could take advantage of the low income year and convert part of it to a Roth. That might bring your income up enough to take advantage of the itemized deductions you already have, and perhaps have some of it taxed at low bracket rates.

And if a low income year never happens, you haven't lost a thing other than a bit of extra administrative time managing another investment account.

--Peter

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