Should You Keep Your Pension or Roll It Over to an IRA?

You should handle the transition carefully if you’re leaving a position where you’ve accrued a pension so you can preserve as much of your savings as you can. There are a few options available to you, such as taking the money out of the pension and transferring it to a new employer-sponsored retirement plan.

Putting your pension assets into a Roth IRA is your third choice. To help you determine whether a pension rollover to a Roth IRA makes sense for you, let’s examine the benefits and drawbacks.

Making the right decision about your retirement savings can be overwhelming, especially when it comes to your pension. Should you keep it as is, or roll it over to an IRA? Both options have their pros and cons, and the best choice for you will depend on your individual circumstances.

Rolling Over to a Traditional IRA:

This is generally the most attractive option, especially if you’re looking for tax benefits. Rolling over to an IRA carries no tax consequences if transferred directly from the pension plan to your IRA trustee. An IRA will also offer you a wider range of investment choices, potentially giving you more control over your retirement savings.

Rolling Over to a Roth IRA:

This option can be beneficial if you expect to be in a higher tax bracket during retirement. With a Roth IRA, you pay taxes on your contributions upfront, but your withdrawals in retirement are tax-free. However, keep in mind that you will have to pay taxes on the full rollover amount in the year you make the conversion.

Keeping Your Pension:

If you’re happy with the investment options offered by your pension plan and you don’t expect to be in a higher tax bracket during retirement, keeping your pension as is might be the best option for you. This can simplify your retirement planning and ensure that you receive a steady income stream in your later years.

Factors to Consider When Making Your Decision:

  • Your current and expected tax bracket: If you expect to be in a higher tax bracket during retirement, a Roth IRA might be a better option.
  • Investment options: If you want more control over your investments, rolling over to an IRA might be preferable.
  • Fees and expenses: Compare the fees and expenses associated with both your pension plan and the IRA you’re considering.
  • Your age and risk tolerance: If you’re young and have a high risk tolerance, you might be comfortable with a more aggressive investment strategy in an IRA.
  • Your overall financial situation: Consider other sources of retirement income and your overall financial goals when making your decision.

It’s important to carefully consider all of these factors before making a decision about your pension. You may also want to consult with a financial advisor who can help you assess your options and choose the best course of action for your individual circumstances.

Here are some additional things to keep in mind:

  • There may be tax penalties for early withdrawals from a Roth IRA.
  • You may not be able to roll over your entire pension into an IRA.
  • Some employers may offer incentives to keep your money in their pension plan.

Ultimately, the decision of whether to keep your pension or roll it over to an IRA is a personal one. By weighing the pros and cons carefully and considering your individual circumstances, you can make the best choice for your future financial security.

Additional Resources:

  • Investopedia: Rolling Your Pension Into a Roth IRA
  • Thrivent: Pension Rollover to a Roth IRA: How It Works & When to Consider It

2, You’d have to cash out your pension

You would have to take a lump-sum payout from the plan in order to roll over your pension into a Roth IRA. (This may happen automatically if the employer ends its plan. The current value of the anticipated monthly benefits you would receive in retirement is equal to this cash-out amount. Before you begin making regular withdrawals, you would receive a smaller amount now to account for any potential investment gains your money might make.

Usually, the administrator would let you know how much of the payout is eligible for a rollover if you ask to cash out your pension. In some cases, you could transfer the entire lump sum. But any amount that is subject to required minimum distributions, or RMDs, cannot be carried over.

You’ll have to pay taxes

You will be required to pay taxes on the entire rollover amount because a Roth IRA uses after-tax money, whereas a pension uses pre-tax money. Some may determine that in order to later take advantage of tax-free withdrawals from a Roth IRA, it is worthwhile to pay taxes now at the current rates. However, if you’ve been employed by the same company for a long time, your tax bill may be large. Before determining whether and when to roll over your retirement assets, speak with a tax expert.

Pros and Cons of rolling over a pension into an IRA


Is it better to roll pension into IRA?

The pros of rolling over a pension plan into an IRA include a wider variety of investment options, tax avoidance, greater control over your retirement savings, and withdrawal flexibility. The cons of rolling over into an IRA include lost creditor protection, no loan options, and penalties on early retirement.

Can I transfer my pension to an IRA?

Yes, you can perform a lump-sum pension rollover into a Roth IRA. However, this option does come with a tax liability, which could substantially eat into your income.

Should I keep my pension or roll it over to a 401k?

There are pros and cons to both plans, but pensions are generally considered better than 401(k)s because they guarantee an income for life. A 401(k) can be more aggressively managed by the individual, which could create more growth than is likely from a pension fund. Then again, investment losses are also possible.

Is it better to leave money in 401k or rollover to IRA?

For most people, rolling over a 401(k) (or a 403(b) for those in the public or nonprofit sector) to an IRA is the best choice. That’s because a rollover to an IRA offers: More control over your portfolio and more personalized investment choices. Easier to get up-to-date information about changes.

Should I roll over my pension plan to an IRA?

But when you roll over your pension plan to an IRA, you must wait until you reach 59 ½ to take a penalty-free distribution. If you take a distribution before age 59 ½, you must pay a 10% penalty on the withdrawn amount, losing a significant amount of your retirement money.

Can I roll my pension into a Roth IRA?

If the rules on your employer’s defined-benefit pension plan allow it, you may be able to take a lump-sum distribution from the plan when you leave your job or retire. You then would have the option of rolling it over into a Roth individual retirement account (Roth IRA). Should I roll my pension into a Roth IRA?

When can I take a pension rollover to an IRA?

Under a company pension plan, you can take a distribution from your retirement account at age 55. If you do a pension rollover to an IRA, you will have to wait until you are 59.5 to take a penalty-free distribution. The penalty is 10% if you take a distribution before 59.5. There are exceptions to this rule.

What happens if you roll over to an IRA?

When you roll over to an IRA, you give up your ability to take loans on your retirement savings. Pension plans may allow participants to borrow or take an advance on their accumulated savings, sometimes up to 50% of their pension contribution. However, this benefit is not available in an IRA.

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