If you're leaving a job where you've accumulated a pension, you'll want to manage that transition wisely so you can hold on to as much of your savings as possible. You'll be faced with several options that may include cashing out the pension or moving the funds into a retirement plan sponsored by your new employer.
A third option is rolling your pension assets into a
Can you roll over a pension into a Roth 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.
Also, you'll need to meet a few requirements to convert your pension assets:
1. The employer offering the pension plan has to allow the lump-sum distribution.
2. The pension has to be classified as a "qualified employee plan" under IRS rules.
3. You need to qualify for a distribution from the pension (i.e., you are retiring or leaving the job). Your plan document will note the qualifications specific to your pension.
When could a pension rollover to a Roth IRA make sense?
For some people, rolling over pension money to a Roth IRA can be an effective way to reduce future taxes and create financial security in retirement. You might consider it if:
1. You want to select the investments
When your money is in a pension plan, you don't have input over how that money is invested.
A Roth IRA, on the other hand, allows you to choose the
2. You want more control over when you can access your money
If you retire and take a monthly distribution from your former employer's pension plan, they set the amount of your benefit. It's the same situation when an employer
A Roth IRA, by contrast, lets you make
3. You can afford the taxes
Converting your pension to a Roth account can provide long-term tax benefits, especially if you expect to be in a higher tax bracket during retirement. But be prepared for a significant tax hit in the year you make the
What are the potential downsides of a pension rollover to a Roth IRA?
There are multiple considerations to take into account when converting a pension to a Roth IRA. Here are three things to consider:
1. You'll have to pay taxes
Because a pension uses pre-tax dollars and a Roth IRA uses after-tax dollars, you'll be expected to pay taxes on the full rollover amount. Some people may decide it's worth paying taxes now at today's tax rates to enjoy tax-free withdrawals from a Roth IRA later on. But if you've been working for the same employer for years, your tax bill could be hefty. Consult a tax professional before deciding if, and when, to roll over your retirement assets.
2, You'd have to cash out your pension
To roll your pension into a Roth IRA, you would need to take a lump-sum distribution from the plan. (This may happen automatically if the employer ends its plan.) This cash-out amount equals the current value of the projected monthly benefits you would receive in retirement. You'd get a smaller amount now to account for potential investment gains your money might accrue before you start making regular withdrawals.
If you request a cash-out of your pension, the administrator typically would disclose how much of the disbursement is eligible for a rollover. In some cases, you could transfer the entire lump sum. However, you can't roll over any amount that's subject to
3. You could lose money
When you have a
How do you roll over a pension to a Roth IRA?
If you do decide a rollover is in your best interest, you'll need to first open a Roth IRA, if you don't already have one. You'll then have to complete any required forms from your receiving IRA provider and from your pension plan, and submit them to the appropriate institution.
You can move your pension assets into a Roth IRA in one of two ways:
When the administrator sends you money, they withhold 20% of the amount for taxes. Because you owe tax on pension funds that you roll into a Roth IRA anyway, this withholding represents a credit toward the total amount of tax you pay on the distribution. If you're younger than 59½, you'll need to use separate funds to make up for that withholding when doing your rollover—otherwise you may have to pay taxes and the 10% early withdrawal penalty on the difference.
You can simplify the process and avoid the 20% tax withholding, however, if you perform a
Get professional retirement planning guidance
Shifting your pension money into a Roth IRA calls for careful consideration. A