Can a pension plan be rolled over to an IRA?

Summary 

What is a pension rollover?

A pension rollover is when you move your retirement money from your pension to another eligible retirement plan.

Historically, businesses offered employees defined benefit plans, which gave employees a lump sum at the end of their careers based on tenure and years of service.  

However, as employees have generally stopped working at the same company for life, the need for a more flexible pension payout system has grown.

Today, workers are more likely to have a 401(k) with their employer. Employers are encouraging workers with a defined benefit plan or pension to do a pension rollover to either a 401(k) or IRA.

Rolling over to an IRA is one of the most popular ways to roll over your pension.

How to rollover pension to an IRA? 

When rolling over your pension into an IRA, there are two conditions you must meet: 

It’s also best to speak with your employer and confirm they will allow the rollover.  

Once you meet the requirements, you can start rolling over your retirement savings.

Firstly, you will need to set up an IRA if you do not already have one. Then, you will need to contact your employer and plan administrator to make a formal request for rollover distribution.  

You can opt for a direct rollover – where the plan administrator makes the payment directly to another retirement plan – or an indirect rollover – where the distribution is paid to you, and you must deposit it into your new account. With indirect rollovers, you have 60 days to complete it.

You can also choose to rollover your pension to a Roth IRA. However, this comes with a tax liability you need to pay in the year you make the rollover.

What are the benefits of an IRA? 

An IRA offers many benefits worth considering if you are planning for retirement.

Unlike a regular pension, an IRA provides tax advantages such as tax-deferred growth.  

Another benefit of an IRA is account control. With a pension account, the employer has control. With an IRA, the account holder has complete control. This can give you more flexibility and power over your future in retirement.  

In this sense, the benefits of an IRA are far greater for people who earn multiple income streams, make regular career switches, or aspire to grow their retirement fund as much as possible before leaving the workforce.  

What should I consider before a pension rollover to an IRA? 

Before you conduct a pension rollover to an IRA, there are a few factors you should consider.  

Some of the most important considerations include: 

You have a much wider variety of investment options when you have an IRA than a standard pension plan. With an IRA, you can invest in mutual funds, bonds, stocks, and other options.  

Some IRAs have fees, such as set-up, annual transaction, broker, and annual account maintenance fees. Determining those fees prior to conducting a pension rollover to an IRA can help you make an informed decision.  

With a regular pension plan, you can take distributions from your account as early as the age of 55. But with an IRA, you only have penalty-free access to your distributions at age 59.5.  

If you want to withdraw distributions before then, you may have to pay a penalty of 10% of the withdrawal. Knowing when you plan to retire can help you make a more informed decision about whether rolling over your pension to an IRA is in alignment with your financial goals.  

Can I still work after rolling over a pension to an IRA? 

As an IRA is not tied to one specific employer, you should be able to continue working after a pension rollover to an IRA.

However, it is important to confirm this before making the change, as not all companies will validate a rollover unless you are leaving the company or officially retiring.  

Get expert financial advice 

Rolling over a pension to an IRA is a decision that offers several tax advantages and increased retirement flexibility. However, depending on your employment contract, it may also have drawbacks, such as age limitations and potential penalties.  

To learn more about rolling over a pension to an IRA, let Unbiased match you with an expert financial advisor so that you can plan your future strategically.