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Author: DonRobin Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120826  
Subject: IRA to Pension Plan? Date: 1/27/1998 11:50 PM
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Please excuse a silly question from a new fool!

My mother needs to buy back several years in a state
employees pension plan but is having trouble raising
the necessary capital. She has enough in an IRA to
cover the bill but the plan admin has informed her that
they won't accept a rollover check (that the IRS
forbids this type of transfer). I'm not sure I
understand this... Can she take the distribution -
20% withholding, pay off the pension buy back, and
deduct it?

The extra $ she earns in retirement form the comes out
to $315/mo if she buys back the years so I'm thinking
that the $6000 she needs to spend to buy back the years is worth it (19 month recoup not including IRA growth).

It would be worth it to pay the penalty and taxes on
the early IRA distribution (she's 54) to go into the
pension, but we're looking for the least expensive
method. Refinancing her house is an option, but then
it's a comparison between tax/penalty vs. closing costs.

Any help would be greatly appreciated!

-Don Robin
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1586 of 120826
Subject: Re: IRA to Pension Plan? Date: 1/28/1998 1:20 PM
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[[ My mother needs to buy back several years in a state
employees pension plan but is having trouble raising
the necessary capital. She has enough in an IRA to
cover the bill but the plan admin has informed her that
they won't accept a rollover check (that the IRS
forbids this type of transfer). I'm not sure I
understand this... Can she take the distribution -
20% withholding, pay off the pension buy back, and
deduct it?]]

Mom will generally NOT receive a tax deduction for her "buy back" into the pension plan. Which is why they won't allow you to rollover an existing IRA.

If you decide to cash out the IRA, Mom will be subject to taxes on the distirubtion (the withholding may be 20%, but the tax may be MUCH higher), and may also be subject to an early withdrawal penalty. So using the IRA may be a problem.

As far as being "worth it", all you can do is run the numbers and see if this benefit is worth the tax cost. You might want to run this by a qualified tax pro in order to make sure that your numbers are "right on".

TMF Taxes
Roy

SPECIAL NOTE: I try to answer as many questions as I can each week, and I generally select those that have not been asked before. If you don't get a detailed answer to your question, it is probably because my time is so limited during tax season, or because it has already been asked and answered in this folder in the past, or because it has been discussed in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's School area (http://www.fool.com/school.htm) and check out "Other Features" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov)


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