Receiving a lum-sum pension plan distribution as a non-spousal benefic

[Guest ashinkasha]

My daughter is the beneficiary of her father's pension plan. As the non-spousal beneficiary, they are telling her she must receive this as a "lump sum" distribution, and cannot roll it over. She will be entering dental school next year, and we want to use this money to fund her schooling. Is there any way to get this "lump sum" into a Roth IRA? if so, would she then be able to take distributions on the capital investment without penalties? She is 19, has no significant income, and we have $112,000 to protect. We need a secure vehicle, with minimal tax implications, and reasonable liquidity.

[david rigby]

Can't answer the question about "protecting" the money. You need a competent tax professional for that.

However, the question about rollover is well-defined: only a spouse has the right of rollover as a beneficiary.

[JAMES PATRICK]

If her Father was born before 1936 she may be able to do a 10 year averaging on the lump sum distribution.

[Guest ashinkasha]

Her Dad was born in 1949, and died unexpectedly (at age 51)after a two month bout with cancer. Trying to find a competent tax professional is like searching the yellow pages for a physician or lawyer - unless you know a good one, it seems to be hit or miss. There are really great ones, really bad ones, and lots of mediocre ones. If I can get an idea of where we could put this money (with three basic goals in mind - minimum tax effects, reasonable liquidity, and reasonable growth to fund dental school and residency) I am more than willing to do more research. One of my friends told me there is a way to fund a Roth IRA, going through several steps, since we can't do a direct roll-over. If there is a better way to do this, I'm open to suggestions. Thanks for your input.

[John G]

q1: I don't see a way to shelter the money, but your daughters tax rate should be low. Absolutely seek a tax advisor about your options and read all of the company pension plan documents carefully.

q2, q3: On where to put the money... given the short time before you will be spending it, I would recommend that you consider either CDs or a bond mutual fund which a short maturity period. You should be more concerned with preserving capital than chasing higher yields. I would not consider investing any of this in common stocks unless you know part of these funds can be left untouched for 5 years, which based upon the info you presented looks unlikely.

[BPickerCPA]

I don't know what tax bracket you will be in when you get the distribution. It's possible that the distribution itself will put you in a higher bracket.

My suggestion is to make sure that the pension must pay out all next year. Sometimes the plan itself will allow a five year payout, although they are not obligated to.

It the pension must be taken by next year, and it's substantial enough, see if they will give you part of it this year so that you can split the income over two years.

Barry

[Bruce Steiner]

Good tax/estates lawyers shouldn't be that hard to find [g].

The law will likely permit your daughter to stretch the benefits out over her life expectancy. But the plan might not. But before she takes the money out, she should make absolutely sure that the plan doesn't.

You didn't say whether you and your daughter's father are married to each other. If so, it may be possible to get the pension benefits payable to you, in which case you would be able to roll them over into your own IRA, potentially convert to a Roth IRA, and designate your daughter, or a trust for her benefit (or whomever you want) as beneficiary, thus achieving a great deal of income tax deferral. I wrote an article on spousal rollovers where the spouse is not the named beneficiary. It appeared in the October 1997 issue of Estate Planning. The lawyer handling your daughter's father's estate, or the lawyer handling your estate planning, should subscribe to this publication.