Personal Investments • Pension Rollover to IRA

Hi all,

My employer currently has a pension plan that they are cancelling and as such, I have a few options that I can choose from:

1. Lump sum
2. Monthly Annuity (default option)
3. Rollover to (existing) 401k
4. Rollover to IRA (tIRA or rIRA)

For context, the amount is question is approx $40,000.

I was debating between option #3 and #4. The lump sum didn't seem enticing (because a lot would be "lost" to taxes) and the annuity I felt very "meh" about.

I was leaning towards option #4 as it gives me the most flexibility in terms of investment options, plus I don't need to pay any 401k fees.

My strategy was to dump the pension (have the provider do it) into an IRA at my brokerage (Fidelity). Seems simple enough, I just have to open up a "Rollover IRA" (effectively a tIRA) at Fidelity. Then I can convert the rollover (tIRA) to my rIRA (I'm already doing a backdoor conversion; this comes into play later). I'm iffy on converting directly to an rIRA because the taxes will not be withheld for me, meaning I have to figure that out later on down the line, which seems complicated.

Now for the fun part:

I'm going to be doing a backdoor IRA again this year (I did one last year as well).

Assuming I go with my plan above, there's two approaches:

1. Do the yearly contribution + backdoor conversion, ignore the rollover (or most of it)
2. Do the yearly contribution + backdoor conversion, convert the entire rollover

For option #1, it appears that I'm being hit by the Pro-Rata Rule b/c I didn't convert the entire "pool" and only a portion (~15%) is non-taxable. Therefore, I need to pay taxes for the remaining ~85%.

Here's the Form 8086 for option #1 (please correct me if I'm wrong):


For option #2, I'm not longer being hit by the Pro-Rata Rule (since everything is cleared out), but I now need to pay taxes on the big chunk (~85%).

Form 8086 for option #2:



Finally, my question(s):

Does my strategy make sense? If so, which option makes the most sense?

If not, should I opt to go with the 401k conversion instead?

I know that was a lot to digest, but thanks for reading it all if you reach this far! Appreciate any guidance you can provide.

Statistics: Posted by SlashTag — Mon Oct 28, 2024 10:15 pm — Replies 1 — Views 118

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