UnThreaded | Threaded | Whole Thread (13) | Ignore Thread Prev Thread | Next Thread
Author: PsychoKnight1 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76398  
Subject: Rollover OUT of Roth, INTO State Pension Plan Date: 9/19/2012 11:27 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Hi Folks,

I want advice in seeking an exemption/waiver with IRS to do something that is clearly illegal, yet clearly within the purpose and general intention of IRS tax code on moving funds between IRA and Pension Plans.


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. The STRS brochure about purchasing service credit says that funds from a traditional IRA can be roll-overed directly to the plan to pay for the purchase. It doesn't mention Roth IRA, only traditional IRA.

Distribution rules on the IRS website on Roth IRA's do not mention moving funds into a pension plan as a permissible distribution. 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.

Should I pursue a clarification from a governing body within IRS, or which oversees the IRS, to decide if what I want to do is permissible and should be granted free of any penalty or tax triggers? 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. I anticipate a 45-50% combined penalty and tax hit.

Help. What should I do? Who do I talk to in this bureacracy?

Thanks for any specific advice,
Paul
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: gdett2 Big gold star, 5000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70925 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 4:54 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
PsychoKnight1,

First, I nothing specifically about what you are asking to do.

I am going to guess the thing you want to put money into is organized, tax wise, as a trad IRA/401K/403B or similar structure. They have pre-tax contributions, all are taxed as ordinary income on withdrawal and are subject to RMDs when you reach 70 1/2.

Roth IRAs/Roth 401Ks are not eligible for pre-tax contributions, are tax free for withdrawals and are not subject to RMDs.

The two systems are authorized by completely separate legislation and have nothing in common.

In general, the Roth accounts are considered the top-line accounts. That is why you seem the movement options going to them not out of them. For me, a Roth is a clear winner.

You can call the IRS, they may be able to explain it, but they are not law makers. That is up to the 535 plus 1.

Gene

Print the post Back To Top
Author: aj485 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: 70926 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 9:55 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
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.
.
.
.
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

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: culcha Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70927 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 9:58 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
To me, it sounds strange to want to get some of your Roth IRA (where qualifired distributions would be tax-free in your retirement) into your pension (where distributions would taxed as ordinary income in your retirement.

Would another possibility be to take some of the savings in your Roth and purchase additional years of toward your pension?

Who do I talk to in this bureacracy?

If you want to talk to anyone, I think I would post your question on the Tax Strategies board. Several tax professionals and retired IRA folks themselves frequest that board -- I've sometimes had informative and useful answers to my questions with 20 minutes of my post. Those people are incredibly helpful, knowledgeable and friendly. http://boards.fool.com/tax-strategies-100155.aspx?mid=302642... If you still want to talk to someone in the IRS, they will be able to point you in the right direction.

culcha

Print the post Back To Top
Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70928 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 10:08 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Personally, I would simply withdraw the principle (the contributions) to the Roths since such are tax and penalty free withdrawals and if I needed more, I would look at a refi or a LOC on my home to get access to the rest.

I assume your pension benefit is credited at a rate higher than the current 7 yr ARM rate or better than Prime (which many LOCs are tied to) so you may be able to use the equity in your property to buy a higher pension without subjecting your retirement dollars to early withdrawal penalties.

I don't see any way for you to withdraw the earnings on the Roths prior to 59 1/2 without penalty and I serious doubt anyone at the IRS would give you the time of day to discuss such a waiver.

Print the post Back To Top
Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70929 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 10:21 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 6
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.

I would be careful about putting all or almost all of my eggs in one basket. Especially since both of you work for the same employer.

Right now, what I read about CA is that it has massive budgetary problems. I wouldn't be so sure that in 10-15 years CA retirement pensions aren't cut. Who is to say that CA doesn't file for bankruptcy or defaults? Everything gets cut 20-40%? Who knows?

I would be looking to see if you can get a lump sum payment at retirement. But thats just me. I'd rather have my money in my grubby little hands as opposed to someone elses.

JLC

Print the post Back To Top
Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70930 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 10:36 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
JLC makes a great point with regard to CA teacher pensions. This is a liget reality facing not only current but future retirees in that system. It is one of the worst if not the worst in the country so be aware of the risks associated with such.

Print the post Back To Top
Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70931 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 11:19 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
Not to scare you, but this is what I'm talking about.

JLC

http://www.nytimes.com/2012/09/20/business/teachers-pension-...

Print the post Back To Top
Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70932 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 11:30 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
I've known of pensions allowing covered employees to purchase additional credits for years of employment prior to the implementation of the plan. But there is usually no free lunch here....what you are buying is the actuarial equivalent of investing the same dollars and averaging an annual return equal to the discount rate of the calculation. Anything is possible, particularly with non-ERISA state pensions....but unless you can find where the state is providing you some kind of guaranteed bonus through the credits that you can show through time value of money calcs to be a true added-benefit, I would be skeptical.

The IRS currently prohibits transfer of after-tax basis from a TIRA to a qualified retirement plan....only the pretax (deductible contributions + rollovers + all earnings) portion of the TIRA may be rolled over. But state pension plans are not ERISA plans, so somehow this restriction may have been worked around so that Roth IRA balances can be rolled into the pension.....but then, how would future annuity payments to the retiree account for the basis? These are the kinds of questions I think I'd be asking the pension plan administrator.

BruceM

Print the post Back To Top
Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70933 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 2:42 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
JLC warns,

Right now, what I read about CA is that it has massive budgetary problems. I wouldn't be so sure that in 10-15 years CA retirement pensions aren't cut. Who is to say that CA doesn't file for bankruptcy or defaults? Everything gets cut 20-40%? Who knows?

I would be looking to see if you can get a lump sum payment at retirement. But thats just me. I'd rather have my money in my grubby little hands as opposed to someone elses

</snip>


Interesting perspective. I seem to remember 20-40% loses in privately-managed 401k plans during the waning days of the Bush Administration.

intercst

Print the post Back To Top
Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70934 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 3:55 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 10
Interesting perspective. I seem to remember 20-40% loses in privately-managed 401k plans during the waning days of the Bush Administration.

What does your personal politics have to do with this? If someone did not go to cash, they would be positive today on those investments.

Additionally, nothing would require the retiree to even invest in stock (privately managed or othewise). They could simply buy an immediate annuity/pension from Vanguard or other low cost entity to offset the risk of lack of future funds and the unfunded liability of the teacher pension.

What JLC is talking about is a complete and permanent reduction in benefits - not a loss due to poor performance.

Print the post Back To Top
Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70935 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/20/2012 5:41 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 4
Politics aside, it still is a time of considerable uncertainty. That means making good investment decisions is not a sure thing. People think stock prices are high (due to efforts to get the President re-elected), muni bonds are risky (due to govts over extended and short of revenue to pay them), bonds are risky (having been bid up by fears in Europe). Some see bubbles everywhere. What is a safe investment?

Meanwhile interest rates are very low, some say artificially low. That makes buying an annuity just now very expensive.

We no longer have the big real estate bubble and bad mortgages that precipitated the '09 decline, but the path to good returns is not so obvious. Its a tough time to make your own investments, and even the pros seem uncertain.

Print the post Back To Top
Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70946 of 76398
Subject: Re: Rollover OUT of Roth, INTO State Pension Pla Date: 9/24/2012 2:29 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
I think you can see why people are investing in home builders and real estate. They at least are undervalued compared to value when the economy recovers. And they are mostly domestic with little foreign exposure.

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (13) | Ignore Thread Prev Thread | Next Thread
Advertisement