What Choice To Make For Defined Benefit Supplement (DBS) Upon Retirement?

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What Choice To Make For Defined Benefit Supplement (DBS) Upon Retirement?

Patty C.
Homeowner · CA · Member since 2014 · 125 posts · 33 votes

What would you do if you had a defined benefit supplement (DBS)? Would you take a lump sum? annuitize it of a period certain? annuitize for life? roll it over to a 403(B)/401(K)? roll it over to an ira?

Lump sum puts me into a much higher tax bracket.

Annuitize it over a period certain would provide a 6.79% return of the savings.

The annuity monthly payment deteriorates with inflation.

Rollover to a 403(b) plan limits options to mutual funds. The benefit, however, is being able to borrow 50% of what is in the account (up to $50K with 5 years to pay back if used to buy a primary residence.

Rollover to traditional and Roth ira only allows for traditional paper assets: stocks, bonds, mutual funds, ETF etc.

Rollover to SDIRA allows for investments into traditional paper assets and alternative assets.

What do you think about doing a rollover to an ira and strategically transitioning it to a Roth IRA to JV? keep it in the ira and use it when a real estate deal can offset the taxes generated when money is distributed? What would you do? Thank you for any suggestions and thoughts.

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3y

I wouldn't hold real estate in a qualified/ retirement plan. Lots of rules and no depreciation, redundant tax advantages. 

I'd need 9% on an annuity, or about $800/mo per $100k.  Risk-free is paying 4.5%, so 6.7% is too low IMO.  Need to offset the inflation risk better as you mentioned @Patty C.

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  • Daniel Murphy
    Financial Advisor · Saint Paul, MN · Member since 2016 · 190 posts · 143 votes
    3y

    The first thing to clarify is that the lump sum is not necessarily taxable. It is only taxable if you take the lump sum & deposit it into your checking / savings account. You can roll the lump sum into another qualified plan (IRA, 401k, 403b) and this will not be taxable to you.

    The second thing to understand is that all of these pension options are (semi) custom to you, & based on complicated actuarial assumptions.  

    The first step I normally take is run a "market rate" comparison of the lump sum offer.  IE- let's say they want to offer you $500 / mo payment, or a $100k lump sum.  I shop rates from a handful of insurance carriers for an immediate annuity or a deferred annuity (trying to make an apples to apples comparison to your offer).  This tells me how your pension buyout offer compares to what you could find on the open market.  

    Think, if they are offering you $500 / mo or a $100k lump sum, but we find that you would have to give an insurance company $125k in order to receive that same $500 / mo income, you know that the lump sum offer from your employer is strong.  (I hope this makes sense)

    From here, you really want to factor in all of the decisions through your current finances and your future plans. This is where you'd really want to talk to someone about your overall finances more.  There are pro's & cons to all options that are all highly dependent on your financial situation. 

    I'm happy to answer any of your questions further if you'd like to dm me. 

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    3y

    I wouldn't hold real estate in a qualified/ retirement plan. Lots of rules and no depreciation, redundant tax advantages. 

    I'd need 9% on an annuity, or about $800/mo per $100k.  Risk-free is paying 4.5%, so 6.7% is too low IMO.  Need to offset the inflation risk better as you mentioned @Patty C.

    1Reply
  • Patty C.
    OP
    Homeowner · CA · Member since 2014 · 125 posts · 33 votes
    3y
    Quote from @Steve Vaughan:

    I wouldn't hold real estate in a qualified/ retirement plan. Lots of rules and no depreciation, redundant tax advantages. 

    I'd need 9% on an annuity, or about $800/mo per $100k.  Risk-free is paying 4.5%, so 6.7% is too low IMO.  Need to offset the inflation risk better as you mentioned @Patty C.


    I agree with your thoughts.  Real estate outside of the ira has the tax-advantages and is also more flexible with what you want to do with it (and no complications with prohibitive transaction rules). Buy and hold is a good way to own real estate...growth and income.

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    3y
    Quote from @Patty C.:

    What would you do if you had a defined benefit supplement (DBS)? Would you take a lump sum? annuitize it of a period certain? annuitize for life? roll it over to a 403(B)/401(K)? roll it over to an ira?

    Lump sum puts me into a much higher tax bracket.

    Annuitize it over a period certain would provide a 6.79% return of the savings.

    The annuity monthly payment deteriorates with inflation.

    Rollover to a 403(b) plan limits options to mutual funds. The benefit, however, is being able to borrow 50% of what is in the account (up to $50K with 5 years to pay back if used to buy a primary residence.

    Rollover to traditional and Roth ira only allows for traditional paper assets: stocks, bonds, mutual funds, ETF etc.

    Rollover to SDIRA allows for investments into traditional paper assets and alternative assets.

    What do you think about doing a rollover to an ira and strategically transitioning it to a Roth IRA to JV? keep it in the ira and use it when a real estate deal can offset the taxes generated when money is distributed? What would you do? Thank you for any suggestions and thoughts.

    I have found Roth accounts to be most advantageous for investment that throw off high current income, like private mortgage notes or high yield bonds.  It’s important to understand that the tax benefits of real property depreciation are actually the benefits of tax deferral, not tax avoidance.  Yes, you can push the deferral all the way down the line until death beats the tax man - but - that requires making a lot of future economic moves that may not be the best from a. Purely tax neutral viewpoint.  Tax Free  Exchanging is heavily touted but comes with many costs, some of which are hidden.  You may end up exchanging into a less than ideal property at a less than ideal time - for example when yields are higher on non real estate assets.  

     
    If you believe that tax brackets are as low as they will go, and will be higher, possibly MUCH higher in the future, then the time to take a “tax hit” may be now, and create or ad to a Roth Self directed retirement account.  Tremendous investment flexibility, no required minimum distributions, zero tax on current income generated by the plans investment holdings, and zero tax on investment appreciation (capital gains) in the plan.  Withdrawals are tax fee.  If it’s possible to “love” a retirement account, this is it in my experience.  

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
  • Patty C.
    OP
    Homeowner · CA · Member since 2014 · 125 posts · 33 votes
    3y

    @Don Konipol

    Yes, it seems we are are at the lowest tax bracket. Better to tear the bandage off now to be taxed on the seed rather than the harvest.

    I

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