3 Tough Choices for Handling Pension Account

Q: I am 60 years old and recently retired. I have about $170,000 in a 401(k) plan with my employer that I am allowed to keep there until I reach age 70 1/2. I am considering three options for dealing with this account: leaving it as it is and changing investment strategies within the plan as economic circumstances dictate; cashing the plan out, using the 10-year forward averaging to minimize my tax obligations and then investing the remainder in tax-free instruments; or cashing the plan out, investing the nontaxable portion in tax-free instruments and rolling the taxable portion into a self-directed individual retirement account. I do not need income from this 401(k) account immediately. Are there any problems with these options? Are there other options I should consider? -- B. M. G.

A: Your question defies a thorough answer in a column as short as this one. In fact, your question defies a quick answer in any medium. But, let’s go over the high points and get you going. According to our experts, you have obviously given much thought to how you should handle your finances, and you have identified your three best options. Our experts concluded, as you apparently did, that none of the three strategies you listed immediately stands out from the rest.

In fact, the experts say, the option you should select cannot be determined without a great deal of evaluation based on a variety of scenarios and assumptions involving, just for starters, such basic items as taxes, inflation and interest rates. You are well advised to evaluate each option under various scenarios, with a range of assumptions about how the economy will perform and how your financial picture might change.

You can do this alone with a stack of books, a powerful calculator and lots of patience and guesswork. Or you can seek help from a qualified financial adviser whose counsel wouldn’t necessarily come cheap. If you do choose a financial planner, be sure to check his or her credentials carefully. You are in no position to risk your retirement nest egg at this point in your life.

Spousal Benefits Rules Differ for Ex-Teachers

Q: I retired last year from my school-teaching job. I am age 65 and was divorced after 18 years of marriage. I applied for Social Security benefits on my ex-husband’s account and was denied on the grounds that we were not married the required 20 years. However, in a recent column you said you had to be married for only 10 years to be eligible for ex-spouse Social Security benefits. Is something wrong here? -- R. K.

A: Nothing is wrong. It’s just that the rules for ex-spouse Social Security benefits do not apply to retired workers receiving a government pension. Remember, government workers seeking spousal Social Security benefits are subject to the “government pension offset.” In the case of teachers, this deduction cuts what you would be eligible to receive in spousal benefits by about two-thirds of your teacher’s retirement. The net result is that unless your teacher’s retirement is quite low, the offset essentially eliminates whatever spousal Social Security benefits you could receive.

However, in some cases this offset is not applied. When? If you were eligible for your teacher’s pension before December, 1982--regardless of whether you actually took it--and if you were married to your ex-spouse for at least 20 years. You missed out because you were married only 18 years.

Retiree May Be Unable to Shift Pension Fund

Q: I recently retired from a public agency where I participated in a 457 plan. These funds were deposited in a savings and loan that is now telling me that, under new depository insurance rules, 457 accounts at any single association will be insured in the aggregate, not per participant. This means that my individual account won’t have federal depository insurance. I want to move my account to another institution, but I am being told that I can’t. May I roll my 457 account over into an individual retirement account? --H. T.

A: No, and what you may do with your 457 account is actually quite limited because, technically, the money in your account belongs to your employer, not you.

Under a 457 plan, you have a contract with your employer specifying that you will get a pension at some date in the future. Until that point, your access to the account and ability to move it around is limited by the terms of the contract. The contract may specifically state which institutions may handle the plan. Further, federal law prohibits taxpayers from rolling a 457 plan into an IRA.

Your only choice is to ask your employer to expand the range of investment opportunities available for the 457 plan. However, be advised: Your suggestion is not likely to be accepted. Agency Pension Won’t Cut Spouse’s Benefits

Q: My husband is a government employee and is eligible to receive a public agency pension. He is also eligible to receive a small Social Security benefit. I am entitled to my own Social Security benefits. Will the fact that he is eligible for a civil service pension in any way reduce my Social Security benefits?-- B. B.

A: No. Your Social Security account stands on its own, and nothing that your husband receives from either Social Security or another pension will affect your Social Security benefits. This would not be the case if you were applying for spousal Social Security benefits. But it is true because you are entitled to your own benefits based on your own contributions to the program.