What to do as Refund Beneficiary of a pension?

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What to do as Refund Beneficiary of a pension?

Postby Ryebrook » Thu Dec 27, 2012 5:56 pm

I recently inherited a pension due to the death of a parent, and could use some guidance on how I should handle the disbursement. I do not have an immediate need for the money, so I would like to keep it as tax sheltered as possible.

The pension is with the Michigan Public School Employees Retirement System, and since she chose the straight life option for the pension, I am entitled only to her personal contributions and interest.

The amount is approximately $37,000, of which $2,000 is already taxed contributions, $32,000 is untaxed contributions, and $3,000 is interest.

On the Refund Beneficiary form that the Michigan Office of Retirement Services sent me, they gave me three options:

1) Have the refund paid directly to me.
2) Have all previously untaxed contributions and interest transferred directly into a qualified retirement plan or IRA, and have previously taxed contributions refunded to me.
3) Have part or all of my previously untaxed contributions and interest transferred into a qualified retirement plan or IRA, and the balance paid directly to me.

At first glance, I would probably take the $2,000 that is already taxed paid directly to me, and have the remainder invested in a "qualified retirement plan or IRA."

However, if I were to do this, would the remaining money ($35,000), be taxed before it was invested in the qualified retirement plan or IRA?

Could I simply set up an IRA account at Vanguard, and have the money transferred to that account without taxes taken out? If I were to do this, would I still need to begin taking distributions from it?

Any and all help is greatly appreciated. The goal is to defer having to pay the tax man as long as possible, and with as little as possible. Also, is there any information I am missing when trying to make this decision?

Thank you in advance.
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Re: What to do as Refund Beneficiary of a pension?

Postby grabiner » Thu Dec 27, 2012 10:59 pm

Ryebrook wrote:1) Have the refund paid directly to me.
2) Have all previously untaxed contributions and interest transferred directly into a qualified retirement plan or IRA, and have previously taxed contributions refunded to me.
3) Have part or all of my previously untaxed contributions and interest transferred into a qualified retirement plan or IRA, and the balance paid directly to me.

At first glance, I would probably take the $2,000 that is already taxed paid directly to me, and have the remainder invested in a "qualified retirement plan or IRA."

However, if I were to do this, would the remaining money ($35,000), be taxed before it was invested in the qualified retirement plan or IRA?


No, but it would become untaxed money in the IRA (that is, a deductible IRA); you would owe tax when you withdraw from the IRA or if you choose to convert it to a Roth IRA.

Could I simply set up an IRA account at Vanguard, and have the money transferred to that account without taxes taken out? If I were to do this, would I still need to begin taking distributions from it?


This is a good deal; contact Vanguard for the procedure, as Vanguard may need to send some forms to Michigan.

Since it is your own IRA, you don't have to take distributions until you turn 70-1/2. (In contrast, if you inherited your mother's IRA, you would have to start taking distributions immediately on an IRA schedule, or else pay tax on the whole thing within five years.)
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Re: What to do as Refund Beneficiary of a pension?

Postby Ryebrook » Fri Dec 28, 2012 9:51 am

Essentially, aren't I inheriting my Mother's IRA in the form of a pension? I am curious as to whether I can have that money transferred to either my existing 401(k) or Roth IRA? Or would I need to create a new IRA that would be taxable?

I am currently not maxing out my 401(k), so there is room for me to increase my contributions there to reach that limit before going for a taxable account.

My 401(k) is through Wells Fargo, and Roth's for my wife and I are through Vanguard.

Also, the money that has already been taxed ($2,000), am I correct in assuming if I take that disbursement directly, it will not be taxed again?

I apologize for all of the questions, but I just want to make sure I handle this properly.
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Re: What to do as Refund Beneficiary of a pension?

Postby BL » Fri Dec 28, 2012 10:16 am

I would contact both Vanguard and the IRS to get this right, as a mistake in titling or handling might result in immediate taxes due, rather than spreading it out over x years. You would need to describe it accurately, something like an inherited non-spousal pension, in order to get the right advice on titling the NEW account, for instance. You could also try to look that up on irs.gov. I don't believe you could put it into your 401k. There is a thread here somewhere about someone who got it done wrong.
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Re: What to do as Refund Beneficiary of a pension?

Postby Alan S. » Fri Dec 28, 2012 6:04 pm

Ryebrook wrote:Essentially, aren't I inheriting my Mother's IRA in the form of a pension? I am curious as to whether I can have that money transferred to either my existing 401(k) or Roth IRA? Or would I need to create a new IRA that would be taxable?

I am currently not maxing out my 401(k), so there is room for me to increase my contributions there to reach that limit before going for a taxable account.

My 401(k) is through Wells Fargo, and Roth's for my wife and I are through Vanguard.

Also, the money that has already been taxed ($2,000), am I correct in assuming if I take that disbursement directly, it will not be taxed again?

I apologize for all of the questions, but I just want to make sure I handle this properly.


I am surprised that the options provided do not clarify that the IRA you could transfer the funds to must be an INHERITED IRA, not an owned IRA or 401k. You should also have a choice between an inherited traditional IRA and in inherited Roth IRA. If you opted for the inherited traditional IRA, there would be no taxes due, but you would have to take annual RMDs over your life expectancy. With an inherited Roth IRA, you would also have to take RMDs, but most of the RMDs would be tax free, since taxes would be due up front if you transferred to an inherited Roth IRA. If you are really interested in an inherited Roth, you should ask the plan why that is not listed as an option. If you choose the inherited traditional IRA, you CANNOT then convert that to an inherited Roth.

You are probably better off taking the 2,000 after tax funds as a cash payment to you (option 2) rather than adding basis to an inherited IRA. The 2,000 would be tax free.
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