What Are the Benefits of Rolling a Pension Into a Roth IRA?


If you have left an employer, even if you are not at retirement age, you have the option to roll over your 401k pension into a Roth IRA and potentially save on taxes in the long run. The rollover amount will be taxed at your normal income tax rates unless your pension is a Roth 401k. Even with this tax hit, it may be a good idea to rollover your pension plan to a Roth IRA.

Tax-Free Growth

  • A large benefit of a Roth IRA is tax-free growth. Any money that you withdraw from a Roth IRA will be completely tax-free at retirement. How much benefit you receive for rolling pension money to a Roth account depends on your age at the time that you roll it over. If you have many years left to work and the money will have many years to grow tax-free, you would probably be better off to roll it over and pay the taxes. If you are older, and the money has less time to grow, the benefits may be less.

More Control

  • With a 401k pension or any other company-controlled pension, you are forced to take the investments that your human resources department has decided that your plan will participate in. Some company pensions have good investment choices, but others have terrible choices with historically poor returns. By rolling the money over into your own Roth IRA account, you can choose any investment that you would like, except for collectibles and some precious metals. By improving your investment returns, you could increase your gains by thousands of dollars by the time you retire.

Better Estate Planning

  • Utilizing the "stretch-out" IRA for estate planning purposes could be a good financial move for your heirs. If the beneficiary of your IRA account is much younger than you are, they can stretch out the distributions from the IRA account over their lifetime, in smaller amounts, giving the account years to continue to grow tax-free. This option may not be available through a company pension plan, because it is up to the individual company if they want to allow this. Even if your company offers it now, this could change at any time in the future.

Exemption From Bankruptcy and Lawsuit

  • 401k plans and other company pensions generally enjoy an unlimited exemption from lawsuits and bankruptcy, meaning that this money cannot be taken to satisfy creditors or a judgment. IRA plans from your own contributions are limited to just over $1 million in exemptions from these occurrences. If your IRA is funded from rolled-over 401k or other pension plan money, it will receive the same unlimited exemption as the 401k. This was often a common reason people left larger balances in the pension account, but it is no longer necessary to do this.

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