• Michael DiBartolomeo

Pension Rollover to IRA | How Does It Work?

Updated: Feb 24

Retiring has become much more comfortable for people over the past few years. A traditional retirement account was often offered by certain companies to their employees. However, not many people today stick with the same company all their lives, meaning they must have a plan B for their retirement account.


Today, rolling over a pension to a traditional IRA and a 401(k) are seen as much more effective pension plans. However, it's important to note that the person must comply with certain requirements first to make a direct rollover into a traditional or Roth IRA.



The Kelley Financial Group's goal is to help everyone with a retirement plan to understand as many things as possible about their retirement accounts and company pension plan. In case someone is looking to understand how income taxes and a defined benefit pension plan work, they may keep reading this guide.


What Is a Pension Rollover?

What Is a Pension Rollover?


In simple terms, a rollover happens when someone withdraws their pension funds, which can be cash or other assets, from a qualified retirement plan and place them into another retirement plan within 60 days. Unless a person makes the rollover to a Roth IRA or designated Roth account, a rollover isn't taxable. Still, it can be reported on the person's federal tax return.


There are some requirements for people who want to transfer their retirement savings into another account, which are going to be outlined below:


First, if a particular plan pays the person an eligible rollover distribution, they have at least 60 days from the date they received the assets to roll them to other retirement plans. In case they miss the 60-day deadline, they may still roll over their pension money if they self-certify that they qualify for a waiver.


Typically, people can make a single rollover in any year, regardless of the number of IRAs they currently have. It's vital to keep in mind that a trustee-to-trustee transfer isn't considered a rollover, so these transfers aren't affected by these limitations. Moreover, if someone is changing a traditional IRA to a Roth Ira, the rule doesn't apply either.


In case the person is working with an employer-sponsored retirement plan, any taxable eligible transfer made to them may be subject to an income tax withholding of at least 20%; this rule applies even if they want to roll these assets from employer-sponsored retirement plans in the future. However, it's important to note that people may not have to experience the 20% withholding if they make a direct transfer.


If the person who wants to make the distribution is under the age of 59, any retirement income that is not rolled over may be subject to pay taxes of up to 10%, unless there's an applicable exception.


Why Would Someone Rollover Their Pension into a Roth/Traditional IRA?


This is a question many people ask their financial advisor. Some people prefer to keep it safe and take monthly distributions from their plan administrator, and others prefer to roll their retirement funds into a traditional or Roth IRA and keep full control over their money.


Overall, a pension is going to pay someone money into their IRA account for the rest of their life. Whether they decide they want a lump sum payout or a monthly annuity, they must follow the rollover rules and the IRS rules.


First, it's important to note that not every pension plan allows people to take a lump-sum distribution plan, such as teachers, who are required to take the monthly annuity. Either way, there are a lot of benefits to rolling over a pension plan into a traditional IRA, and this article is going to outline these benefits below.


An IRA is always going to have more variety of investment options in comparison to defined benefit plans since the latter offers only a selected amount of approved investments. It's vital to keep in mind that an IRA allows people to invest in funds/index funds, bonds, stocks, and many other assets that can protect their future income.


On the other hand, if someone makes a direct rollover transaction to an IRA, they may not have to pay taxes for distribution. This is because traditional IRAs are tax-deferred retirement accounts, meaning people don't have to pay anything until they withdraw the funds. In case someone makes the transaction to a Roth IRA, they may have to pay taxes when they transfer their pension plan. However, people don't have to pay any taxes to make a withdrawal from a Roth account.


A regular pension plan often limits how (and when) people can make a withdrawal. However, IRAs allow people to withdraw their funds with more flexibility if they're planning on doing it before they retire. Overall, people don't have a maximum number of times they can withdraw funds, but they may have to pay income taxes. Still, some exemptions may help some people, such as medical expenses, education expenses, or home purchases.


In essence, people are going to have much better control over their retirement savings if they roll over their pension to an IRA. For an instance, a person who is interested in investing $20,000 of their savings can choose where to open their IRA, enjoy a wider range of investment options, and choose the way in which they want to allocate their assets in their investment portfolio.


It's important to keep in mind that, even if the person changes their job in the future, they can keep their current IRA and save for their retirement. In the case of a regular employer's retirement plan, people would have to stop taking contributions if they leave the job.


Many things can help people if they transfer their pension plans into an IRA, whether they choose a lump sum distribution or the annuity plan. Unfortunately, everything in life has its advantages and disadvantages, meaning there are also some cons people must be aware of if they're looking to adjust their pension plan.


Disadvantages of Making a Pension Rollover Into a Traditional/Roth IRA Retirement Account


Overall, the disadvantages aren't enough to make anyone choose not to roll over their pension plan into an IRA. Still, all of the disadvantages outlined below are worth considering.

First, people may not be able to take further loans on their retirement savings if they rollover to an IRA. Overall, a pension plan allows people to take an advance on their savings of up to 50%, which is great for financial planning. Unfortunately, this benefit isn't available for Roth IRAs or traditional IRAs.


People can withdraw money from their rollover IRA if they want, but they may have to pay income taxes. If someone wants to avoid paying taxes at all while making an early retirement, this may not be an option for them.


Age is another factor worth considering for most people. Overall, a pension plan allows people to take a tax-free distribution if they leave the company they're working at when they're 55 years old. In the case of an IRA, people must wait until they turn 59½ years old if they don't want to pay tax for early withdrawals. Depending on the amount of money the person has in their IRA account, the penalty can be considerably high.


Retirement savings from pension plans are always creditor-protected, meaning that creditors cannot take control over someone's funds in any situation, such a bankruptcy. On the other hand, an IRA doesn't have this level of protection. The IRA benefits for people are different depending on the state, so people need to review their state's rules before making any decision.


Rolling Over a Pension Plan Into an IRA


Now that this article outlined both the benefits and disadvantages of rolling over a defined benefit plan into a tax-deferred account, as well as the tax implications, it's time to review all the steps into completing this job. The best option is always going to be working with a certified financial planner to ensure everything goes smoothly.


Still, here are the steps into rolling over a defined benefit plan and taxable income into an IRA:


Following the IRS Rules

People must comply with IRS Publication 575 if they want to make a rollover correctly. It's important to note that these rules apply to 401(k) and 401(b) plans too. Moreover, it's vital to note that if people don't follow the rules while transferring their traditional pensions, they may have to pay unnecessary taxes.


If people choose a lump-sum distribution, they must roll it over to a tax-advantaged account.


Choosing a Preferred Rollover Option

As mentioned before, people can choose either a direct or indirect rollover, depending on their needs. In the case of a direct rollover, people must set up the IRA account and explain every detail to the plan administrator. There, the administrator is going to take care of the transfer process without the person having to do anything. Here, people don't have to worry about creating a taxable event.


On the other hand, an indirect rollover involves issuing a lump-sum distribution via check and depositing the mutual funds into the account within 60 days. It's important to note that any deposit made after the 60-day deadline is going to create a taxable event, which must be reported in the person's annual tax return.


Dealing with Stocks

If someone has any company stock in their current receiving plan, they must sell it. In essence, they're not allowed to keep the stock and rollover cash. On the contrary, people must first sell the stock to be able to roll over the money. Some IRA providers may be able to complete this process on the person's behalf for a fee.


Rollover to a Roth IRA

Here, a person's funds are considered taxable in the year they make the distribution, but once they make it, any future income is tax-free.


Rollover to a Traditional IRA

As long as people make the contributions within 60 days of the lump sum being paid, they may not have to pay any taxes. Still, it's critical to keep in mind that early withdrawals still involve taxes.


Rollover to a Self-directed IRA

In this case, people may have a wide range of investment options to consider. The tax implications in this IRA rollover depend on which type of account the person chooses to open.


Miscellaneous Details to Consider

There are some cases in which the pension freezes, meaning there are some things the person must consider when readjusting their financial strategy.


First, the person must consider all their sources of retirement income, such as their plans, IRAs, rental property income, other pensions, family income, and others. Moreover, the person must review all their current expenses and determine whether they're going to keep having these expenses once they retire. These expenses often involve rent, healthcare, transportation, and more.


It's important to note that retirement income should last the rest of a person's life. People cannot make any accurate predictions on how their life is going to be some years from now, but they can make a few guesses based on how they're living their life today.


How to Know If Someone Is Eligible for a Rollover


Generally speaking, there must be a distributable event. Typically, this event happens when the person leaves their previous employer. On the other hand, some cases, such as reaching the age of 59½, getting disabled, or death may be considered a distributable event to be eligible for a rollover.


Still, it's always best to contact a financial expert to determine which personal scenarios apply as a distributable event.


Can People Still Work After a Rollover?

Can People Still Work After a Rollover?


Most people wonder whether they can keep working after making their rollover. Overall, people can keep working. However, if the private companies they're working at are closing their pension plan, they can still work there.


On the contrary, if these companies aren't closing their pension plan, people must either make the rollover and stop working with the company or keep working with their current plan.


Bottom Line


As mentioned before, making a rollover can bring many benefits to a person's financial administration, but they must ensure they're complying with all the necessary rules. Once they choose whether they want an annuity or a lump sum, they must work with their wealth advisor in Pittsburgh PA so that they don't incur any unnecessary tax payments.

If anyone needs help with their specific case, such as how to invest 5 million dollars, people can contact the team at the Kelley Financial Group in Pittsburgh, PA!

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