Cash Balance Pension Early Termination - Lump Sum/Annuity

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jaj2276
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Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by jaj2276 » Sun Sep 08, 2019 6:03 pm

I have $125k in a cash balance plan that is heading for early termination. I have two options for my money:

1) Roll the money in to an IRA
2) Convert the amount to an annuity at "retirement age."

My marginal tax rate is close to 45% (35% federal, 5% state, 3.8% NIIT, 0.9% medicare tax).

If I roll the money to an IRA, I will have two choices. I can leave it in an IRA, track basis on that IRA, and pay taxes (pro-rated) on my yearly backdoor Roth IRA contributions. Or I can convert it to a Roth immediately. Assuming I can afford the tax hit, is this marginal rate just too high for the tax-free benefit of the Roth to overcome? I've always wanted to avoid the hassle of needing to keep track of the basis in my non-Roth IRAs but maybe a 45% tax hit is worth it.

I'm currently 43 and am interested in retiring sometime in my 50s. The current proposal says that my estimated monthly annuity benefit to be about $1500/month (single life annuity). The retirement age used is 65. I did some research and believe that I can choose 59.5. Does anyone know if this is correct? If I'm able to choose 59.5, then I think the monthly retirement goes down to about $1050. Should I try and see if I can select a later date than 65 to try and allow me to use my portfolio earlier in life knowing that I'll have this "guaranteed" income?

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Watty
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Re: Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by Watty » Sun Sep 08, 2019 6:32 pm

A couple of things to look into.

1) With the pension option what happens to it if you die before you start it?
jaj2276 wrote:
Sun Sep 08, 2019 6:03 pm
The current proposal says that my estimated monthly annuity benefit to be about $1500/month (single life annuity).
2) You need to figure out more of the details of how this works and how inflation might impact that. Sometimes it will be something like a cash balance that grows based on something like a 10 year treasury or 3%, whichever is more. That could be a lot different than than the way some other plans are calculated.

Longdog
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Re: Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by Longdog » Sun Sep 08, 2019 6:43 pm

Wouldn’t the basis on the IRA be zero?
Steve

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Duckie
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Re: Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by Duckie » Sun Sep 08, 2019 8:10 pm

jaj2276 wrote:I have $125k in a cash balance plan that is heading for early termination. I have two options for my money:

1) Roll the money in to an IRA
2) Convert the amount to an annuity at "retirement age."
If choosing #1, to avoid the pro-rata rule do you have a current or former employer plan like a 401k that will take incoming rollovers?
Longdog wrote:Wouldn’t the basis on the IRA be zero?
The basis on the rollover would start at zero, but since he's using the backdoor Roth method the basis would increase every year.

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jaj2276
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Re: Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by jaj2276 » Mon Sep 09, 2019 9:15 am

Watty wrote:
Sun Sep 08, 2019 6:32 pm
A couple of things to look into.

1) With the pension option what happens to it if you die before you start it?
I'm pretty sure the amount is forfeited as it's not a period certain annuity. Obviously that's a big risk of choosing an annuity.
Watty wrote:
Sun Sep 08, 2019 6:32 pm
jaj2276 wrote:
Sun Sep 08, 2019 6:03 pm
The current proposal says that my estimated monthly annuity benefit to be about $1500/month (single life annuity).
2) You need to figure out more of the details of how this works and how inflation might impact that. Sometimes it will be something like a cash balance that grows based on something like a 10 year treasury or 3%, whichever is more. That could be a lot different than than the way some other plans are calculated.

No need to understand how the cash balance plan worked as it's being terminated. The money has grown to what it is now and I'm trying to decide whether to take the lump sum and roll it to an IRA or annuitize it.

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jaj2276
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Re: Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by jaj2276 » Mon Sep 09, 2019 9:29 am

Duckie wrote:
Sun Sep 08, 2019 8:10 pm
jaj2276 wrote:I have $125k in a cash balance plan that is heading for early termination. I have two options for my money:

1) Roll the money in to an IRA
2) Convert the amount to an annuity at "retirement age."
If choosing #1, to avoid the pro-rata rule do you have a current or former employer plan like a 401k that will take incoming rollovers?
We're looking at seeing if our 401k plan can take non-401k money. I've rolled previous employer's 401k in to current 401k, but never tried a cash balance plan to 401k or a traditional IRA to 401k.
Longdog wrote:Wouldn’t the basis on the IRA be zero?
The basis on the rollover would start at zero, but since he's using the backdoor Roth method the basis would increase every year.
[/quote]

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Watty
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Re: Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by Watty » Mon Sep 09, 2019 1:01 pm

jaj2276 wrote:
Mon Sep 09, 2019 9:15 am
Watty wrote:
Sun Sep 08, 2019 6:32 pm
A couple of things to look into.

1) With the pension option what happens to it if you die before you start it?
I'm pretty sure the amount is forfeited as it's not a period certain annuity. Obviously that's a big risk of choosing an annuity.
Watty wrote:
Sun Sep 08, 2019 6:32 pm
jaj2276 wrote:
Sun Sep 08, 2019 6:03 pm
The current proposal says that my estimated monthly annuity benefit to be about $1500/month (single life annuity).
2) You need to figure out more of the details of how this works and how inflation might impact that. Sometimes it will be something like a cash balance that grows based on something like a 10 year treasury or 3%, whichever is more. That could be a lot different than than the way some other plans are calculated.

No need to understand how the cash balance plan worked as it's being terminated. The money has grown to what it is now and I'm trying to decide whether to take the lump sum and roll it to an IRA or annuitize it.
It would be good to ask about these questions to verify how it works.

I have an old traditional pension plan that was converted to a cash balance plan, the balance was based on the pension benefits that had been accrued on the date it was terminated.

The company does not make any additional contributions to the cash balance plan.

The cash balance grows a certain percent each year based on the ten year treasury with a guaranteed minimum.

Once you terminate employment with the company you can take a lump sum or leave it in the plan. If you leave it in the plan it will continue to grow or you can take a lump sum at any time up until you turn 65. At 65 it will be converted to an annuity based on your cash balance.

If my wife and I both die before starting the annuity then our estate would get the cash balance.

Like yours in the paperwork is says the annuity amount is just estimated or projected since they are not sure what the annuity will really be then.

Pension plans can be different so yours may not work that way.

It should only take a few minutes to call and confirm your understanding of those two questions. I would also add a third question to see if you do not take the lump sum now, then can you still take a lump sum later.

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Wiggums
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Re: Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by Wiggums » Mon Sep 09, 2019 1:05 pm

Good suggestions, Watty.

EnjoyIt
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Re: Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by EnjoyIt » Mon Sep 09, 2019 1:18 pm

jaj2276 wrote:
Sun Sep 08, 2019 6:03 pm
I have $125k in a cash balance plan that is heading for early termination. I have two options for my money:

1) Roll the money in to an IRA
2) Convert the amount to an annuity at "retirement age."

My marginal tax rate is close to 45% (35% federal, 5% state, 3.8% NIIT, 0.9% medicare tax).

If I roll the money to an IRA, I will have two choices. I can leave it in an IRA, track basis on that IRA, and pay taxes (pro-rated) on my yearly backdoor Roth IRA contributions. Or I can convert it to a Roth immediately. Assuming I can afford the tax hit, is this marginal rate just too high for the tax-free benefit of the Roth to overcome? I've always wanted to avoid the hassle of needing to keep track of the basis in my non-Roth IRAs but maybe a 45% tax hit is worth it.

I'm currently 43 and am interested in retiring sometime in my 50s. The current proposal says that my estimated monthly annuity benefit to be about $1500/month (single life annuity). The retirement age used is 65. I did some research and believe that I can choose 59.5. Does anyone know if this is correct? If I'm able to choose 59.5, then I think the monthly retirement goes down to about $1050. Should I try and see if I can select a later date than 65 to try and allow me to use my portfolio earlier in life knowing that I'll have this "guaranteed" income?
Have you considered starting a small business? Maybe a resale on eBay or something of the sort. If you had a small business you can create an individual 401k. I know fidelity is very kind at taking traditional IRAs and converting them into your individual 401k. I'm sure other brokerage houses will do the same. I also know that Vanguard is not so kind.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

Topic Author
jaj2276
Posts: 493
Joined: Sat Apr 16, 2011 5:13 pm

Re: Cash Balance Pension Early Termination - Lump Sum/Annuity

Post by jaj2276 » Mon Sep 09, 2019 2:45 pm

Watty wrote:
Mon Sep 09, 2019 1:01 pm


It would be good to ask about these questions to verify how it works.

I have an old traditional pension plan that was converted to a cash balance plan, the balance was based on the pension benefits that had been accrued on the date it was terminated.

The company does not make any additional contributions to the cash balance plan.

The cash balance grows a certain percent each year based on the ten year treasury with a guaranteed minimum.

Once you terminate employment with the company you can take a lump sum or leave it in the plan. If you leave it in the plan it will continue to grow or you can take a lump sum at any time up until you turn 65. At 65 it will be converted to an annuity based on your cash balance.

If my wife and I both die before starting the annuity then our estate would get the cash balance.

Like yours in the paperwork is says the annuity amount is just estimated or projected since they are not sure what the annuity will really be then.

Pension plans can be different so yours may not work that way.

It should only take a few minutes to call and confirm your understanding of those two questions. I would also add a third question to see if you do not take the lump sum now, then can you still take a lump sum later.
Sorry, I must not have made myself clear in my original post. I KNOW how the cash balance plan works/worked. I know how much I could contribute and I know how much I got credited. I also know that I don't have any options of "leaving it in the plan" because the plan is being terminated/discontinued. I'm being given the option of taking the $125k as a lump sum -or- electing to annuitize the $125k with the the payouts starting at my retirement date (effectively a deferred annuity).

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