lumpsum/pension/non-qual annuity??

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

lumpsum/pension/non-qual annuity??

Postby enret » Fri May 03, 2013 12:32 pm

Hello,

My name is Elena, I am new to this site and I am impressed with the knowledge people display here.
I appreciate your advice.

I am 66, just retired.
I have a pension from the company, which I can take as lump sum.
$376K as lump sum or $2100 monthly with 50% survival rate for my husband. it is about 6.5% payout.
My husband is working part time, maybe for another year, he is 67.

we both have 401K . I am leaning to take pension, for safety. However looking ahead, we realize we will have considerable taxes starting at 70, with RMD from both 401K.
we currently have 300K in after tax savings.
We just wonder maybe we should take my pension as lump sum, add to IRA account, and buy annuity with after tax money ?

Does it make sense? I understand that those $376K will be part if RMD, and taxed, but should be considerably lower.

thank you for your help.
Elena
enret
 
Posts: 6
Joined: Fri Mar 08, 2013 6:02 pm

Re: lumpsum/pension/non-qual annuity??

Postby Frugal Al » Fri May 03, 2013 2:14 pm

Elena, I don't think we have enough information about you and your husband. What are your balances in the 401ks? What are your current investments? What portion of your retirement is the $376,000? What portion of your retirement expenses is covered by your SS and your other investments? Is your home paid off? What kind of longevity can you and your husband expect? What is right for one person may not be right for another; however, you're correct that your RMDs would be lower with the IRA than from the DB plan.
User avatar
Frugal Al
 
Posts: 1429
Joined: Fri May 28, 2010 11:09 am

Re: lumpsum/pension/non-qual annuity??

Postby ourbrooks » Fri May 03, 2013 2:32 pm

You might try going to http://www.immediateannuities.com or the Vanguard site and pricing annuities. I suspect that you're getting a pretty good deal from your company.

A reason for waiting on any annuity is that fact that annuity payouts increase with age. At age 70 for the same purchase price, you'll get more each month than if you got the annuity at age 65.
ourbrooks
 
Posts: 1172
Joined: Fri Nov 13, 2009 5:56 pm

Re: lumpsum/pension/non-qual annuity??

Postby enret » Fri May 03, 2013 4:18 pm

Thank you for your replies.

Al,
details about our financial situation:
between two of us we have about $1M in 401K plans, and $350K in savings after tax.
SS for both of us total 60K, no debts, mortgage paid off. I am 66, my husband 67.

the question we consider - does it make sense to try to reduce our future taxes by replacing
pension with annuity paid with 'after tax money' ?

Elena
enret
 
Posts: 6
Joined: Fri Mar 08, 2013 6:02 pm

Re: lumpsum/pension/non-qual annuity??

Postby swong » Fri May 03, 2013 7:55 pm

Evening Elena,
From reading your first posting you situation is almost practically identical to mine with minor differences. I retired at 62 and just recently receiving monthly annuity deposits from MetLife purchased by my former employer. My company offered the higher of 3 options: a RIGP (retirement income guaranteed plan) based upon a formula (0.014 x avg of my 5 best years salary x max of 30 years) or a CBRA (cash balance retirment account) or finally a TRA (transitional retirment account). I elected to take the company purchased MetLife joint and survivor annuity which would provide immediate monthly income just so I would not have to continually move/transfer money around to pay recurring bills. More importantly, it would allow me to leave my investments alone to further appreciate in value. I am a residnet of NYC which allows the first 20k of my pension to be tax exempt from NYS taxes which was another reason.

While I have not tapped into SS as yet my goal is to refrain a long as possible since my SS benefit appreciates 6% more each year...where else can I get this type of risk free return?...no where! YOu mentioned minimizing your tax exposure and I also have beat my head against the wall trying to minimize my tax bite especially federal taxes. I've found that there is no free lunch and inevitably you will pay ....if not now then later. I'm presently 63 and in a little more than 7 years I also have the issue of RMD's. My hope is with each passing year tax legislation might be more gentle (probably not) but until then enjoy a little...you've worked hard, saved frugally all your life and wouldn't it be a shame if through no fault of your own, you pass unexpectedly? You mentioned having a good nestegg of 1 mil or more....just keep in mind a million dollars isn't that much money especially if you reside in expensive locations (NYC, LA, Chicago to name a few). My suggestion to you is do NOT use a 1-legged stool for retirement investments and savings....me, I have a 4 legged stool retirment strategy....US Savings bonds purchased throughout the last 30 years, a triple tax free NYC GO municipal bond portfolio giving me a added $40k per year income, a years worth of cash in easily accessible money market funds/CD's and then finally a equity portfolio watched continuously like a hawk. You neglected to mention where you reside...it would be interesting just to know where as it is very important in both you long term and short term planning.
swong
 
Posts: 41
Joined: Tue Nov 13, 2012 8:51 am

Re: lumpsum/pension/non-qual annuity??

Postby Frugal Al » Sat May 04, 2013 1:59 am

Elena,as you know there are a lot of moving parts involved when determining the best way to distribute retirement funds to minimize taxes. Exchanging a qualified pension distribution with what appears to be a good payout, considering it's 50% joint life, for a non qualified annuity with a lesser payout probably isn't the best way to go about it.

You didn't say if you and your husband have actually started SS yet. It's probably better to try to develop a SS claiming strategy combined with some planned low income years to burn off 401k money and do Roth conversions. You've both got a few years until RMDs are required.
User avatar
Frugal Al
 
Posts: 1429
Joined: Fri May 28, 2010 11:09 am

Re: lumpsum/pension/non-qual annuity??

Postby bsteiner » Sun May 05, 2013 10:13 pm

If one has enough other assets to live on and to pay the tax on the conversion, and if the lump sum can be rolled over into an IRA, there could be additional value in taking the lump sum, rolling it over into an IRA, and converting it to a Roth (perhaps spreading the conversion over a number of years to avoid bunching the income into a high bracket in one year).
bsteiner
 
Posts: 939
Joined: Sat Oct 20, 2012 10:39 pm
Location: NYC

Re: lumpsum/pension/non-qual annuity??

Postby Frugal Al » Mon May 06, 2013 6:06 am

bsteiner wrote:If one has enough other assets to live on and to pay the tax on the conversion, and if the lump sum can be rolled over into an IRA, there could be additional value in taking the lump sum, rolling it over into an IRA, and converting it to a Roth (perhaps spreading the conversion over a number of years to avoid bunching the income into a high bracket in one year).

I would lean that way myself as well, bsteiner. The OP seems to be more comfortable with a pension or annuity, whereas I'd probably like to wait till I'm 75 or so to annuitize. There could be a sequence of returns risk with the latter which the OP may not wish to take.
enret wrote: I am leaning to take pension, for safety.

That being the case it makes sense to keep the pension, and work around improving the tax placement of the other funds. Taking the pension is probably going to be the default position in most cases unless there's solid evidence to suggest otherwise. While it may not always be the optimum choice, it is generally the safe choice (assuming the pension falls within PBGC guidelines). The OP hasn't shared with us what anticipated retirement expenses might be, longevity expectations, or if they wish to leave a legacy. Those factors could also change the situation.
(Edited for clarity)
User avatar
Frugal Al
 
Posts: 1429
Joined: Fri May 28, 2010 11:09 am

Re: lumpsum/pension/non-qual annuity??

Postby swong » Mon May 06, 2013 9:13 am

Everyone's financial situation is almost always unique and while some lean towards a pension others may not. My parents when they were alive always instilled upon us the fact that for every dollar we earned we should sock away a good portion of it for futre date. They were dirt poor having come into the states right after the war and it was some of the most sage advice they have ever given to us kids. My circle of friends include not only people of very modest means to the obscenely affluent and they all agree pensions should be one leg of your retirement stool. Presently a stock market is on a tear and until a mongo sized correction comes it's absurd to consider moving moving tapping into your well chosen equities and hopefully carefully selected index funds which is why a pension suits my immediate needs. It covers most if not all monthly recurring expenses.
A million dollars is not a huge amount of money.... just research how many millionaires the country presently has. This number is also hugely distorted since many count their homes as part of their net worth. I personally do NOT simply because your home if sold will require immediate money expended to source shelter. BTW, when this inevitable market correction does come I will bet net worth for everyone will drop as much as 20%. My most pressing concern is hoping the country will see a marked improvement in unemployment numbers ... kids are graduating each year with no hope of good employment, federal and state cutbacks are increasing, and with the population aging I fear if we all come down with a emergency situation just trying to get a hospital bed will require taking a number in the ER and waiting until a bed frees up.
swong
 
Posts: 41
Joined: Tue Nov 13, 2012 8:51 am

Re: lumpsum/pension/non-qual annuity??

Postby teacher » Mon May 06, 2013 1:39 pm

bsteiner wrote:
If one has enough other assets to live on and to pay the tax on the conversion, and if the lump sum can be rolled over into an IRA, there could be additional value in taking the lump sum, rolling it over into an IRA, and converting it to a Roth (perhaps spreading the conversion over a number of years to avoid bunching the income into a high bracket in one year).


Just a heads-up: The ROTH roll-over will increase income, perhaps impacting taxes, and (a fact we did not consider) in our case, increased Medicare cost.
User avatar
teacher
 
Posts: 742
Joined: Sun Oct 05, 2008 6:45 pm
Location: California

Re: lumpsum/pension/non-qual annuity??

Postby enret » Tue May 07, 2013 1:28 am

Thank you all for your advice, suggestions and for sharing your stories.
I followed all the recommendations, compared pension conditions with annuity market and decided to take company pension. My SS is postponed for now, at least while my husband is still working.
Later our SS's and pensions should provide for most of our immediate needs, and this at least will make me sleep better. and taxes, oh well, no escape I guess.

Regarding the suggestion to do conversion of regular IRA to Roth IRA (by Al and Sworn)
I do not understand the value of it. If I had new money coming I would use Roth, but to convert existing IRA would generate huge taxes, why to do it now? RMD will spread those taxes over many years. What I am missing here?

again, thank you all for help.
enret
 
Posts: 6
Joined: Fri Mar 08, 2013 6:02 pm

Re: lumpsum/pension/non-qual annuity??

Postby Bill M » Tue May 07, 2013 7:14 am

enret wrote:RMD will spread those taxes over many years. What I am missing here?

One of the advantages of a Roth is that there are no RMDs. So if the pension and Social Security really cover your expenses, you won't need to touch it. The bad case is when the unneeded RMD from a traditional IRA causes the SocSec benefits to become taxable too.

By delaying Social Security, you are creating a few "gap years" when your taxable income is lower. Filling the low tax brackets with Roth conversion is often a good strategy. But there is no substitute for running the numbers and seeing how it plays out in your exact situation.
Bill M
 
Posts: 241
Joined: Sun Dec 30, 2012 11:10 pm

Re: lumpsum/pension/non-qual annuity??

Postby Frugal Al » Tue May 07, 2013 9:13 am

Bill M offered good clarification. Elena, with RMDs on the 401k at about $36k per year, SS of 60k, and 25k from pension, and whatever income the 376k in taxable spins offs, your income will be > $122k per year, probably 85% of your SS will be taxable, and you're in the 25% marginal tax bracket. Take a look at the SS tax calculator to see how various income amounts and sources might affect your taxes http://www.calcxml.com/calculators/how- ... calcoutput.

As teacher notes above, the Roth conversion can result in higher Medicare premiums, but only for the duration of those resultant higher income years.
User avatar
Frugal Al
 
Posts: 1429
Joined: Fri May 28, 2010 11:09 am

Re: lumpsum/pension/non-qual annuity??

Postby JW Nearly Retired » Tue May 07, 2013 9:23 am

enret wrote:Thank you all for your advice, suggestions and for sharing your stories.
I followed all the recommendations, compared pension conditions with annuity market and decided to take company pension. My SS is postponed for now, at least while my husband is still working.
Later our SS's and pensions should provide for most of our immediate needs, and this at least will make me sleep better. and taxes, oh well, no escape I guess.

Regarding the suggestion to do conversion of regular IRA to Roth IRA (by Al and Sworn)
I do not understand the value of it. If I had new money coming I would use Roth, but to convert existing IRA would generate huge taxes, why to do it now? RMD will spread those taxes over many years. What I am missing here?

again, thank you all for help.

I don't see the point to taking the lump sum. You already have a good sized 401k & taxable account now. The pension is diversification. If you didn't have the pension many would recommend annuitizing some of your portfolio so you create one. I would take the pension and delay SS as long possible. Delaying SS is an extremely good deal for a married couple.

Having a lot of income so you need to pay considerable taxes at age 70 is a good problem to have.
JW
Retired Summer 2013
JW Nearly Retired
 
Posts: 4055
Joined: Sun Dec 16, 2007 1:25 pm

Re: lumpsum/pension/non-qual annuity??

Postby enret » Tue May 07, 2013 2:05 pm

Al, Bill,
thanks for explanation. I did not even know that SS is not fully taxed.
JW Nearly Retired wrote:Having a lot of income so you need to pay considerable taxes at age 70 is a good problem to have.
JW


JW - yes, that's what my husband says. :-)
enret
 
Posts: 6
Joined: Fri Mar 08, 2013 6:02 pm


Return to Personal Finance (Not Investing)

Who is online

Users browsing this forum: CPABOB, ddunca1944, DFrank, Globalviewer58, Grt2bOutdoors, LateStarter1975, MoonOrb, MooseandBear, munemaker, Naismith, Quickfoot, RayCharles2012, Steelersfan, Wagnerjb, Zecht and 82 guests