Defined Benefit Plan to Roth IRA?

[gahoo35]

I am trying to figure out what to do with a small defined benefit plan from my fellowship.  I was required to make mandatory pre-tax contributions to a DBP that have added up to ~$2000.  Because I was only in the position for 1 year the employer match will not vest, but the plan allows me to take a lump sum separation benefit consisting of my contributions (with some interest) that can be directly rolled over into a Roth IRA.  I've been researching this option but I cannot figure how this will affect my current and future investments.  Can the rollover go directly into my current Roth IRA account or do I need to put it into a traditional IRA and convert it?  Do I claim the lump sum as income on my income taxes next April to convert the funds from pre-tax to post-tax?  Will this rollover affect my ability to do a backdoor Roth in the same fiscal year?

Thanks in advance for any help.  I'm relatively new to WCI but I've learned so much in the past couple of months from reading the forums and prior posts.  I just wish I would have heard about WCI sooner!

[AZdoc68]

gahoo35 wrote:

I am trying to figure out what to do with a small defined benefit plan from my fellowship.  I was required to make mandatory pre-tax contributions to a DBP that have added up to ~$2000.  Because I was only in the position for 1 year the employer match will not vest, but the plan allows me to take a lump sum separation benefit consisting of my contributions (with some interest) that can be directly rolled over into a Roth IRA.  I’ve been researching this option but I cannot figure how this will affect my current and future investments.  Can the rollover go directly into my current Roth IRA account or do I need to put it into a traditional IRA and convert it?  Do I claim the lump sum as income on my income taxes next April to convert the funds from pre-tax to post-tax?  Will this rollover affect my ability to do a backdoor Roth in the same fiscal year?

Thanks in advance for any help.  I’m relatively new to WCI but I’ve learned so much in the past couple of months from reading the forums and prior posts.  I just wish I would have heard about WCI sooner!

Click to expand...

Not an expert on this but to my knowledge from my past experience you can't directly rollover your DBP funds (pre-tax money) to a Roth IRA (which represents post-tax money).  Your potential choices are:

1) Leave the funds in the DBP if allowed

2) Roll the money tax-free directly into a 401k with a new or past employer if allowed

3) Roll the money tax-free directly into a traditional IRA and leave it there (this will complicate future backdoor Roth contributions due to the "pro-rata rule")

4) Roll the money tax-free directly into a traditional IRA and convert it to Roth, paying the applicable taxes due

5) Take the money as a lump-sum distribution and either spend it or save it in a taxable account, also paying the taxes due

 

From what you wrote I gather you are interested in doing backdoor Roth contributions (as you should be) and your current income is high enough that you can't contribute to a Roth directly nor are you eligible for deductible traditional IRA contributions.  In that case, I would choose option #2 if allowable and if you have a 401k option that has good, low-cost investment options.  In the alternative, I would choose option #4 and pay the tax due out of your current work earnings since the tax liability on $2000 won't be all that much.

[jfoxcpacfp]

gahoo35 wrote:

I am trying to figure out what to do with a small defined benefit plan from my fellowship.  I was required to make mandatory pre-tax contributions to a DBP that have added up to ~$2000.  Because I was only in the position for 1 year the employer match will not vest, but the plan allows me to take a lump sum separation benefit consisting of my contributions (with some interest) that can be directly rolled over into a Roth IRA.  I’ve been researching this option but I cannot figure how this will affect my current and future investments.  Can the rollover go directly into my current Roth IRA account or do I need to put it into a traditional IRA and convert it?  Do I claim the lump sum as income on my income taxes next April to convert the funds from pre-tax to post-tax?  Will this rollover affect my ability to do a backdoor Roth in the same fiscal year?

Thanks in advance for any help.  I’m relatively new to WCI but I’ve learned so much in the past couple of months from reading the forums and prior posts.  I just wish I would have heard about WCI sooner!

Click to expand...

You can roll directly into your Roth IRA or set up a separate Roth IRA to receive the funds if you don't want to commingle the funds. The reason for keeping separate is that different rules apply to Roths that you have contributed directly to and those that are the result of a conversion. If you don't plan to take any $$ out of your current Roth, I'd just go ahead and roll directly into it. No need to go through a TIRA and then convert.

You will receive a 1099-R next January showing the amount of rollover as a taxable event but you will owe no penalties. Since you are a resident and your income will increase when you become an attending (even if you have 1/2 year of income as an attending this year), this is what I would recommend you do.

[gahoo35]

Thank you for the great responses!  My wife's salary bumps us out of the window to directly contribute to a Roth IRA so we have to use the tIRA conversion.  I also do not have any pre-tax qualified accounts for a transfer.  All of my employer retirement savings have been into a Roth 403b.  While I hope to not touch my Roth IRA for decades, I like the idea of creating a second Roth account to keep things separate should the DBP to Roth direct rollover be questioned.

[AZdoc68]

Thank you for the correction on the direct Roth rollover