What are my options with this pension plan check?
June 5, 2013 3:22 PM Subscribe
I was issued a check from my old company's pension plan. Apparently it needs to go into a retirement account. Can you help me understand my investment options?
Hello,
First, obviously, you are not my financial advisor, accountant, etc. But, if you clicked on this, you probably know more about this than I do, and I do appreciate your time, knowledge, and guidance.
I worked briefly for a company many years ago and I was enrolled in their pension plan. Vanguard, the company's pension plan administrator, recently issued a check (as a direct rollover) to me of approximately $2500 to close out my pension plan account as the amount was below the plan's required minimum of $5000. The check has been made payable, at my request, to my financial institution (a large regional credit union) with me as FBO. Vanguard tells me that the check needs to go into a retirement account and that I cannot simply cash or deposit it.
I am trying to better understand what my options are with this check. My credit union offers IRAs (traditional and Roth) but they do not provide advisement when it comes to helping members choose an appropriate investment option. The credit union does offer separate investment services, but this is a fee-based service and I would like to be better informed before going that route (or avoid it entirely if at all possible).
A little about me: Mid-30's, single, college graduate, not currently employed, living off of (rapidly depleting) savings. Looking for work!
So, here are my questions:
1) What is the practical difference between a traditional and Roth IRA? Does one make more sense over the other given my circumstances and/or the amount?
2) Should I need* to cash the IRA out, which IRA is the better choice? What would be the process to cash out? What are the tax implications given each IRA type? (I generally do my own taxes online - would this create a tax preparation nightmare?)
3) Are there other retirement account investment options that you would recommend I consider instead of an IRA? Or am I locked in to an IRA?
*I am currently unemployed and this amount of money would definitely help with expenses and pay off some smaller debts. It would NOT be recklessly spent. Let me also stress here that I completely appreciate and believe in the need to save money and plan for retirement and this would be a last-resort option.
Please let me know if you need any other details and I will be happy to provide them.
Thank you in advance!
Hello,
First, obviously, you are not my financial advisor, accountant, etc. But, if you clicked on this, you probably know more about this than I do, and I do appreciate your time, knowledge, and guidance.
I worked briefly for a company many years ago and I was enrolled in their pension plan. Vanguard, the company's pension plan administrator, recently issued a check (as a direct rollover) to me of approximately $2500 to close out my pension plan account as the amount was below the plan's required minimum of $5000. The check has been made payable, at my request, to my financial institution (a large regional credit union) with me as FBO. Vanguard tells me that the check needs to go into a retirement account and that I cannot simply cash or deposit it.
I am trying to better understand what my options are with this check. My credit union offers IRAs (traditional and Roth) but they do not provide advisement when it comes to helping members choose an appropriate investment option. The credit union does offer separate investment services, but this is a fee-based service and I would like to be better informed before going that route (or avoid it entirely if at all possible).
A little about me: Mid-30's, single, college graduate, not currently employed, living off of (rapidly depleting) savings. Looking for work!
So, here are my questions:
1) What is the practical difference between a traditional and Roth IRA? Does one make more sense over the other given my circumstances and/or the amount?
2) Should I need* to cash the IRA out, which IRA is the better choice? What would be the process to cash out? What are the tax implications given each IRA type? (I generally do my own taxes online - would this create a tax preparation nightmare?)
3) Are there other retirement account investment options that you would recommend I consider instead of an IRA? Or am I locked in to an IRA?
*I am currently unemployed and this amount of money would definitely help with expenses and pay off some smaller debts. It would NOT be recklessly spent. Let me also stress here that I completely appreciate and believe in the need to save money and plan for retirement and this would be a last-resort option.
Please let me know if you need any other details and I will be happy to provide them.
Thank you in advance!
I'd put it in a Vanguard Rollover IRA. As to the specific funds to invest in, I think Vanguard probably has guidance about the right investment mix for someone at your age and stage of life, and which funds would provide that mix.
I don't know enough to know if the funds you currently possess qualify as pre-tax or post-tax. If they are pretax, then you'll have to pay tax on them if you want to do a Roth. Given that your most pressing financial concern right now seems to be having enough money to pay your bills, I'm not sure that taking on added tax liability now to gain a small tax advantage in the future is a smart choice.
Perhaps you can defer this decision for a couple months until you've lined up work.
posted by Good Brain at 5:30 PM on June 5, 2013
I don't know enough to know if the funds you currently possess qualify as pre-tax or post-tax. If they are pretax, then you'll have to pay tax on them if you want to do a Roth. Given that your most pressing financial concern right now seems to be having enough money to pay your bills, I'm not sure that taking on added tax liability now to gain a small tax advantage in the future is a smart choice.
Perhaps you can defer this decision for a couple months until you've lined up work.
posted by Good Brain at 5:30 PM on June 5, 2013
Forget a credit union. Go to an advisor like Edward Jones or Raymond James, and they will advise you what needs to be done. As I recall you have only 60 days to get the money into the new account.
posted by megatherium at 5:13 AM on June 6, 2013
posted by megatherium at 5:13 AM on June 6, 2013
What you can do with the money depends on how it is classified. Is it qualified or non-qualified? In other words did you already pay taxes on it. In most cases this type of transaction is a qualified rollover. You open a rollover IRA. Pick a fund, for Fidelity or Vanguard you will have lots of options, conservative to agressive.
Forget going to an advisor for this small amount. The fees will eat up years of any potential gain.
FWIW you could cash this out and pay regular income taxes on 100% of the distribution. You probably won't have to pay any penalty, but it could be 10% of the total, or 10% of the difference between your contributions and the net current value.
posted by Gungho at 7:40 AM on June 6, 2013
Forget going to an advisor for this small amount. The fees will eat up years of any potential gain.
FWIW you could cash this out and pay regular income taxes on 100% of the distribution. You probably won't have to pay any penalty, but it could be 10% of the total, or 10% of the difference between your contributions and the net current value.
posted by Gungho at 7:40 AM on June 6, 2013
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The major difference is: Traditional IRAs are taken from pre-tax money, and taxed as income when you begin withdrawing (tax-deferred). Roth IRAs are taken from post-tax income and not taxed again (tax-exempt). Motley Fool has more. There are some slight differences in withdrawal timelines as well.
Should I need* to cash the IRA out, which IRA is the better choice?
For both, you may withdraw at any time. You may have to pay taxes on it, including an addition 10%, unless you have an exemption.
Are there other retirement account investment options that you would recommend I consider instead of an IRA? Or am I locked in to an IRA?
You didn't mention, but I'm going to write as if this were a 401k. If you had a new employer, you could put the money in the new 401k account. But you said you're unemployed, which means you probably won't be using that, or a SEP IRA or an individual 401k.
I suggest rolling into an IRA, probably Roth (you can pay the taxes on it for this year, which will be low). You should be able to open a IRA account as a CD easily at your credit union, or find a low-cost, low-minimum mutual fund or brokerage to invest the money with.
posted by the man of twists and turns at 3:35 PM on June 5, 2013