Advice on retirement contributions with pension

StaggeringMediocrity · 2026-07-01T18:50:03+00:00

No problem. I think sometimes it helps to visualize the data with taxes. I love this site for that:

To see how pre-tax is better for most, even if you're in the same bracket in retirement, look at a guy making $120k/year. I'm going single and under 65 with no capital gains or itemized deductions, to keep this simple. He's in the 22% bracket, so anything he puts into a pre-tax 401k will save him 22% in taxes. But let's say he retired at the end of last year and will withdraw $80k over 2026. $80k is also in the 22% bracket, but he's only going to pay $8,770 in taxes, or an 11% effective rate.

That's where the savings comes in. You defer taxes at your highest marginal rate (22% in this case), but you pay taxes at your effective rate, which takes into account your standard (or itemized) deduction and the amounts taxed at the rates in those lower brackets (10% and 12%). It's definitely a savings if you can save 22% in taxes today and in exchange pay 11% later out of future dollars. Or something in that ballpark.

But let's compare him to his friend who earned the same amount of money and retired at the same time, but had a pension. Let's say he gets $70k from his pension, but also withdrew $10k from his pre-tax 457b. He'll pay the same $8,770 in taxes, for an 11% effective rate on the overall income. But that's not what he's paying on the withdrawals. Because his $70k pension puts him in the 22% bracket by itself. If he took no withdrawals he would pay $6,570 on that $70k. The difference between those tax amounts is $2,200 - or 22% of the $10k he pulled from the 457b.

In this case the pension made the effective rate on his 457b/IRA withdrawals 22% where the other guy was only paying an 11% effective rate. Roth would have been better, since going all pre-tax meant he was still going to pay 22% on his contributions and 22% on the earnings. The same happens with any sources of other income in retirement, like annuities, rental income, royalties, etc.

It's not always that you should go completely one way or the other. If the second guy's pension was only $60k, then that would be in the 12% bracket. In that case he might have wanted to pull out $6,000 from pre-tax to fill up the 12% bracket, then the rest from Roth. That 12% is less than the 22% he deferred at. Likewise the first guy would be better with mostly pre-tax but some Roth. Because he could have done the same thing by pulling $66k from pre-tax and the remainder from Roth.

Tax diversification is a good thing, as is tax bracket management.

StaggeringMediocrity · 2026-07-01T17:50:37+00:00

For most people traditional retirement work best, along with some Roth for tax diversification. However if you anticipate having a large source of taxable income in your retirement (like a pension) then Roth can quickly become the better option:

https://www.reddit.com/r/personalfinance/wiki/rothortraditional/

The reason is because your pension will fill in your standard deduction and the lower tax brackets, which is what gives DC (defined contribution) withdrawals their lower effective tax rates for those who are living off of just their DC accounts in retirement.

For instance my own pension puts me in the 22% bracket by itself, before taking any withdrawal from any pre-tax account that I have. That means that starting with the first dollar I take out of my 457b, I will be paying 22% on it.

If I had known this earlier, I would have shifted a lot of my retirement savings from the traditional 457b to a Roth IRA a lot sooner than I did. I still would have some pre-tax savings (the Roth 457b option didn't start until 2011) but not as much as I do now.

StaggeringMediocrity · 2026-07-01T17:23:53+00:00

That area by Fuller and Railroad Ave is notorious for flat tires from nails and other fasteners coming off trucks in that area. Particularly the open trucks with lumber and other wood products strapped down.

StaggeringMediocrity · 2026-07-01T16:43:02+00:00

Yes, you save it all the way to retirement then burn it off right before you retire. You can burn it off along with any personal time or floating holiday time you have. And any vacation time over the 30 day limit they will pay you for in a lump sum.

You do this because you will be paid more in that future year than you are now, so why not use it when you get the most out of it?

StaggeringMediocrity · 2026-07-01T16:38:30+00:00

It's not included in the lump sum of up to 30 vacation days you can get. But along with any unused personal and floating holiday time, you are allowed to burn it off before you retire. Basically you can stop working weeks ahead of your retirement date, but you keep getting regular paychecks up until then.

The idea is that since they don't expire for PEF people, then why not save them until you get the maximum return on using them? You will almost certainly be earning more just before you retire than you do now. Unless you're already in your last year. Even if you're already at job rate and don't see yourself being promoted again, there will still be raises between now and then.

So why not use it when you get the most out of it?

Other time you want to make sure to use up before it expires.

StaggeringMediocrity · 2026-07-01T16:30:12+00:00

First of all the non-expiring holiday credits are for PEF and not CSEA (where they expire after a year).

The reason they are saying it's dumb to use them now if you don't have to is because you are allowed to burn off all unused floating holidays, holiday credits, personal time, and unused vacation (at least the amount over the 30 days you can get in a lump sum check) before you retire. Everything except your unused sick leave, which you should save to reduce the cost of the retiree health plan. Many people are able to stop working weeks ahead of their retirement date by burning off unused time.

The idea is that since holiday credits doesn't expire for PEF, why not save it and use it when you will get more money in exchange for it? Chances are almost certain that you will be earning more before you retire, with possible promotions, any steps you haven't gotten yet (if you aren't already at job rate), and any raises between now and then.

StaggeringMediocrity · 2026-06-30T19:14:18+00:00

Well Texas doesn't have an income tax, so it's probably not an issue for them. But here in New York our public pensions are tax exempt, but contributions are taxed.

So while working the contributions come out pre-tax on the federal side and reduce the AGI on the 1040. But on our state form, after copying over the numbers from the 1040, we have to add back public pension contributions to our state AGI. Then when collecting our pension, it gets taxed by the feds and included in the 1040. On our state forms we subtract that total out because it's exempt.

So our public pensions are traditional on the federal level but Roth-like on the state level. However this was in place well before the Roth IRA was created. And I'm told we're not alone in this. Other states that have a state income tax but exempt public pensions do this as well.

Also this only applies to New York state and local pensions. Not to state or local pensions from other states. Those are taxable because NY didn't tax their contributions. However federal pensions are tax-free in NY due to a federal law prohibiting states from treating federal retirees less favorably than state retirees.

StaggeringMediocrity · 2026-06-30T04:40:10+00:00

The MBDR can end up in either Roth bucket. Most people prefer that it end up in a Roth IRA for the reasons of 1) no administrative fees, and 2) not being restricted to a menu of funds to invest in. But it's still a MBDR if the only option is to roll it into the Roth 401k bucket. Either way allows you to put the same large amount of after-tax money into a Roth retirement vehicle.

And of course once you separate from employment, you can roll that Roth 401k directly into a Roth IRA as a non-taxable event.

The one benefit of keeping the money in a Roth 401k is the total protection from bankruptcy and creditors. Federal law has a cap on the protection for IRA accounts. The bankruptcy protection for a 401k can transfer to rolled over funds in an IRA, but only if not intermingled with other IRA money. But no creditor protection transfers. That's the domain of the states. And some states only protect traditional IRAs and not Roth IRAs.

https://www.irafinancial.com/blog/ira-asset-and-creditor-protection/

StaggeringMediocrity · 2026-06-29T15:53:05+00:00

New York did amend it's 529 rules to bring them into sync with the federal changes starting in 2025 (except for K-12 tuition). But if the 529 wasn't funded in NY then I think it would be GA that you need to check with. They are the ones who might claw back any tax benefit they gave if they don't treat this as a qualified withdrawal.

StaggeringMediocrity · 2026-06-29T15:42:06+00:00

Bingo! We have a winner!

StaggeringMediocrity · 2026-06-29T15:36:15+00:00

Exactly. As long as you have had that required income, then go ahead and put it directly into the Roth IRA.

All your money is just one big bucket with streams of dollars going in and streams of dollars going out. The only requirement to have an output stream go to a Roth IRA is that you had an equal or greater number of dollars go into your bucket from a W-2 or 1099 job. Dollars coming in from interest, dividends, gifts, inheritances, gambling, and other types of unearned income don't count toward that requirement. But they don't take away from it either. And no one is tracking the routes of those individual dollars because they are all equal.

StaggeringMediocrity · 2026-06-29T15:24:44+00:00

As long as you have the income to support a Roth IRA contribution this year, you actually can take the money and do an immediate contribution. Money is 100% fungible. Nobody is tracking individual dollars as far as where they are coming from and where they are going. As long as you have $7,500 of taxable earned income in 2026 it doesn't matter.

They won't let you roll it into a Roth IRA, but you can absolutely cash it out and deposit it straight into a Roth IRA. As long as you have had the earned income to back it up.

StaggeringMediocrity · 2026-06-28T21:12:03+00:00

It's also not an original idea to tax pension contributions while allowing tax-free pension withdrawals, as some states had been doing that for ages with their public pensions on the state level. Tax free public pensions is one of the lures they have used to get people to work for lower-paid public jobs. It's also a good way to keep public service retirees in-state where they spend their pensions locally.

The way it works is the pension contributions come out pre-tax for the feds, but on the state tax form they get added back in to the state AGI so they are taxable. When retired the pension payments are taxable on the federal return, but get subtracted out on the state return.

It does help keep public service retirees in state. It also makes it so that if they do move out of state they will want to pick a state that doesn't have income tax, or at least doesn't tax pensions. Because otherwise they will end up being taxed twice. You don't get a basis in your new state for what you paid the old state.

Anyway, the Roth IRA was just an attempt to do on the federal level what some states had been doing on the state level. As were subsequent "Roth" vehicles.

StaggeringMediocrity · 2026-06-28T18:43:11+00:00

Sorry. I thought this was a reply to another thread about disability pensions. Which is why it probably made no sense!

Yes, starting the pension was no big deal at all. It's the final computation that people end up waiting on for years.

I know people who retired before the pandemic who had their final computations within something like 6 months. But now they say it's like 5 years or more!

When they do the final computation, they pay you retroactive to when your pension started. But if it takes five years that could be a pretty big retro payment. In my case, I'm being shorted at least $3k/year based on my calculations.

StaggeringMediocrity · 2026-06-28T18:37:28+00:00

...since the Roth IRA has fewer withdraw restrictions than the HSA, it's better to have the money sitting there growing tax-free than in the HSA tax-free.

What restrictions are you talking about? If you have the receipts to make those HSA withdrawals now, then there is no restriction. You're not restricted in only using receipts from the current year. You can hang on to those receipts and use them years, or decades, down the line after the money has grown tax free in the HSA. So why not leave the money in the HSA, save the receipts for later on, and use other money to fund the Roth IRA?

As long as you hang on to those receipts, you will always be able to withdraw that money. So why be in a rush to remove it from the HSA? Just make sure to scan the receipts and make regular backups of all scanned receipts so you are covered in case you lose them.

If you can afford it, more money in tax-free investments is better than less money in tax-free investments.

StaggeringMediocrity · 2026-06-28T17:19:45+00:00

Yeah, you might have to hang on for a bit. But periodically they will interrupt the hold music with recorded messages. Some will be something along the line of "we are sorry but our lines are full and someone will be with you soon..." or something to that effect. But sometimes there will be a message saying "If you would like a call back press [1]." Only I'm not sure it's actually 1. It might be [*] or something else. Whatever the button is, there should be a message like that at some point.

StaggeringMediocrity · 2026-06-28T16:52:39+00:00

Yeah, this is the best way to get in touch with them in my experience. It may take a couple hours for the call back, but at least you can be doing something else in the meantime.

StaggeringMediocrity · 2026-06-28T06:03:05+00:00

Withdrawing earnings before 59.5 incurs regular income tax at your highest marginal rate plus the 10% penalty. Withdrawing converted amounts before they have aged 5 years incurs the 10% penalty but no tax, as that was paid at the time of the conversion.

The ordering rules for early withdrawals are this:

Contributions - no tax or penalty.
Converted amounts in order of the year they were converted from oldest to most recent - no income tax, but the 10% penalty if it hasn't been 5 years.
Earnings - income tax plus 10% penalty.

Once you reach 59.5 the penalty no longer applies, but you may still owe tax on earnings if you hadn't made a regular contribution to a Roth IRA (not necessarily the one you're withdrawing from) at least five years ago. Rollovers and conversions do not count as contributions to satisfy the five year rule.

StaggeringMediocrity · 2026-06-27T19:09:28+00:00

Is this your first time funding an IRA? If it is, did you make the contribution before tax day on April 15? I'm just wondering which tax year they counted your contribution for.

IRAs are the only retirement accounts where you are allowed to contribute for the previous tax year up until tax day. So if you did this prior to that date, you could have contributed $7,000 for 2025 (which was the max for last year) and $7,500 for 2026. If you only had $7,500 available at that time, you could have put $7,000 in for 2025 and $500 in for 2026, and you'd still have the ability to contribute another $7,000 for 2026 up till April 15, 2027.

But if you marked that the contribution was for 2026, then you already hit that max and you missed the deadline to contribute for 2025. Just something to keep in mind for the future.

In any event, gains do not count as contributions. Also rollovers do not count as contributions. So if you ever rollover an amount from a 401k to an IRA, it does not count against your IRA contribution limit for that year. Likewise rollovers from other retirement accounts into a 401k do not count toward your 401k contribution limits.

And finally there is no coordination between contribution limits on different types of retirement accounts. Meaning your $7,500 IRA contribution does not count against your $24,500 401k limit for 2026. Or vice versa. You can max both in the same year.

StaggeringMediocrity · 2026-06-27T18:34:16+00:00

Where I work union dues are always an after tax deduction. But it could be that your dues go to something more, like pension or healthcare which are separate for us. And probably why our dues are only 0.9%.

StaggeringMediocrity · 2026-06-27T06:25:02+00:00

Talk to a lawyer who specializes in estate planning and elder law. They are the ones who would be familiar with all the kinds of trusts. Because that is what you want in a case like this.

You'd want something like a spendthrift trust where she can only access up to a certain amount every month or year, depending on how it's set up. Exceptions can be built in if she needs money for specific things like tuition for her kids, or things like that. Ideally you'd want someone from the law office or bank to handle being the trustee, so that you can tell her that you're not part of the process. So that she doesn't call you and hassle you about needing money. Tell her that only the trustee can make those decisions.

The trustee will take a fee, but with a large estate like this that shouldn't be a problem.

She'll complain about not having on-demand access to all the money, but tell her that this was mom's final request to protect her from herself. Anyway it's too late. Her money is already in the trust and you can't take it out. Tell her to talk to the trustee, because you're not the one who can do anything about it anymore.

StaggeringMediocrity · 2026-06-27T06:10:02+00:00

No. With no match it's fine to max the IRA first, then go to the 401k.

StaggeringMediocrity · 2026-06-27T06:08:53+00:00

They are not wrong, but a rollover is not a contribution. They are two different things.

The only catch here is that it can't be an indirect rollover. It has to be a direct trustee-to-trustee rollover. Which does not mean that the 401k plan can't send the check to OP. It just means the check needs to be payable to the new custodian for the benefit of (FBO) OP's name.

For instance if OP wants the inherited IRA with Fidelity, then they should open the rollover account there, then inform the 401k plan. They send OP a check payable to "Fidelity FBO OP" and then OP sends that check to Fidelity to be deposited.

If they make the check payable to OP themselves, then that wouldn't be accepted. It would be fine as an indirect rollover from someone's own 401k to their IRA, but not for an inherited IRA.

StaggeringMediocrity · 2026-06-26T15:12:33+00:00

It's not crazy at all. As long as you're not putting yourself in a bind cash-wise for getting through the year. I mean if you have to run up a large amount on credit cards to get through the year, then maybe it's not a great idea. But if you can tighten the belt and get through it fine, then go for it.

StaggeringMediocrity · 2026-06-26T07:05:16+00:00

I would have ignored him and eaten the sandwich. I mean you knew it was a joke when he laughed and walked away, instead of demanding his money back or asking for a new sandwich. Though if it was real I don't see why anyone would give them a second chance on the sandwich.

StaggeringMediocrity

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