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Disclaimer: I know a tax specialist should always be consulted. This particular situation is about $1500 and I'd like to handle it on my own. I know the advice or ideas on here should always be run through a tax professional.

Background: Wife and I file separately due to a federal student loan forgiveness program. It keeps her payments VERY low, and after making 120 of those (3 years left), the balance is forgiven. If we file jointly the payment will go from about $300/mo to over $1000/mo. That's why we file separately. This limits us on Roth IRA contributions to the point where we cannot make a conventional contribution to a Roth, however, we utilize a the backdoor Roth method to make annual maximum contributions.

Situation: An odd law passed in IL that required all state education employees that contribute to the pension fund to contribute an additional .4% to the fund to cover early retirements (or some such thing). The law stated if the program ended, the .4% would be refunded. It ended and she is now eligible for a ~$1500 refund.


1- Take a direct payment. The state withholds 20% for the IRS and it appears since its considered a retirement distribution from a pension plan an additional 10% penalty will be due at tax time.

2- Roll into an eligible retirement plan. Since the money is pre-tax money, I think I could just roll it over into a Traditional IRA and let it ride. I could also roll it into the Traditional and then a Roth and pay the tax due on it at tax time and avoid the MAGI limits. For simplicity sake, I think rolling it into a Traditional makes sense.

Question: Do roll over's such as this count towards your annual IRA contribution limit? We have each maxed out a Roth IRA already for 2016. If I rolled the pension distribution (refund) into a traditional (or Roth) would that mean I am exceeding my annual contribution limit? In my private sector job, I can make 401(a) contributions above and beyond my $18,000 annual limit with post-tax dollars and then roll those post-tax dollars into a Roth IRA which doesn't count towards my $5500 annual limit and I'm wondering if I could do something similar with these funds.

Any other ideas would be much appreciated. I'm willing to do the research, just need a nudge in the right direction. I could call the IRS, but I've found speaking to them is as good as reading the rule book. They essentially seem to read the reg verbatim and are hesitant to break it down into layman's terms. You folks, are good at doing that and thus I am here!


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