Should You Rollover a Pension to an IRA?
Your pension plan pays a regular income to you when you retire. Normally, this income is paid out through an annuity payment from your pension plan administrator. However, you also may have the option of rolling the pension into a private account. If you do, know the implications of rolling your pension into an IRA.
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Types
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You may roll your money into two types of IRAs. The first type is a traditional IRA. The second is a Roth IRA. By rolling your pension into an IRA, you take control of your retirement funds. Both types of IRAs are subject to rules on taxation and the distribution of funds.
Function
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When you roll your pension into a traditional IRA, the pension funds come under your control because you choose the investments. No tax is due on the rollover; you pay taxes when funds are withdrawn. When you roll your pension into a Roth IRA, you must pay income tax, since the Roth accepts only after-tax cash contributions. Withdrawals are tax-free.
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Benefit
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A pension typically invests in an annuity to produce income for you during retirement. However, the income may not be enough to let you live comfortably. An IRA allows you to invest in anything you want, creating the potential for higher income.
Disadvantage
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The disadvantage of moving your pension into an IRA is that you could lose all your investment money. If you are not an experienced investor, you may end up with much less in retirement income than you expected. You could run out of income before you die, placing you in financial hardship.
Considerations
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If you roll your money into an IRA, consider using at least some of the money to purchase an annuity. This way, you are guaranteed some income and are less likely to run out of money when you need it the most.
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