How Do I Roll Over Money From a Pension to a Roth IRA?

You can do it, but be prepared to pay some taxes

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Roth IRAs and pensions are two possible choices you have to fund your retirement. Depending on your situation and your preferences, one might be better than the other for you. For example, pensions often guarantee payments for life (unless the fund goes bankrupt), but you can't control your investment choices. Roth IRAs allow your money to grow tax-free, and you can choose your investments. 

If you have money in a pension fund now and you prefer to have it in a Roth IRA, you're not necessarily stuck. There are ways to roll over pension fund money into a Roth IRA, just like you might with a 401(k) or a traditional IRA. However, there are a few things to know first, such as how to prepare for the tax bill. We'll help you decide if it's right for you and help you get ready. 

Key Takeaways

  • Yes, you can roll over money in your pension into a Roth IRA. 
  • You will need to pay taxes on the rollover amount, and this can be a substantial amount.
  • You'll need to choose your own investments and you may need to wait slightly longer to get access to your money, compared with your pension plan. 

Can You Roll Over Pension Funds to a Roth IRA?

Yes, it's possible to roll over funds from your pension to your Roth IRA. Some pension plans even offer the option to receive a lump-sum payment when you retire rather than have the pension continue to manage your money and send you monthly checks. Rather than take the money out in cash and potentially pay an additional 10% penalty if you're under age 59 ½, it's a good idea to put it in another retirement plan, such as a Roth IRA

You should be able to contact your benefits administrator to see how much money you have available in your pension plan. From there, you can make the decision about which, if any, retirement account would be appropriate to roll it over into to meet your needs. 

Limitations of Rolling Pension Funds Into a Roth IRA

Roth IRAs have a lot of advantages compared to other retirement accounts. But that doesn't mean they don't come with disadvantages as well. Here are the main limitations on rolling money into a Roth IRA, especially if you'll be doing it from a pension.

Be Prepared To Pay Taxes

Money is usually put into your pension with pre-tax dollars. Roth IRA contributions, on the other hand, are made with after-tax dollars. So when you roll over a pre-tax account like a pension into an after-tax account, you'll need to pay those taxes that you would have paid had you just made Roth IRA contributions.

Depending on how much you're rolling over, that could mean you'll have a hefty tax bill. You can get a rough estimate of what your tax bill might be by multiplying the amount you'll be rolling over by your tax bracket. For example, if you're in the 22% tax bracket, you'll have to pay $2,200 in taxes for every $10,000 you roll over from your pension into your Roth IRA. 

If the idea of a big tax bill scares you but you still want to move money out of your pension, consider rolling it over into a traditional IRA. Since they're both pre-tax accounts, you won't owe any taxes.

Pay Attention to Stricter Age Requirements

Many pension plans allow you to retire and start receiving benefits as soon as you reach age 55, although this can vary by plan. If you opt for a Roth IRA, though, you won't be able to withdraw your earnings until you're a bit older—age 59½—unless you pay a 10% early withdrawal penalty, barring a few exceptions.

If you'll be retiring early, this means you may need to have other savings to tide you over until you can start making regular withdrawals from your Roth IRA. Alternatively, you'll need to keep working until you're nearly 60. 

You can withdraw your contributions to your Roth IRA anytime. It's only when you start withdrawing your earnings that you could owe taxes and penalties.

More Potential for Investment Error

When you had money in your pension, someone else was managing it for you. With a Roth IRA, you're in the driver's seat. That's great if you want to choose your own investments, but on the other hand, it also means that there's a lot more potential for costly error if you don't know what you're doing. 

Should You Roll Your Pension Funds Into Your Roth IRA?

Rolling your pension over into your Roth IRA isn't for everyone. Here are some questions to ask yourself to help you decide if it's right for you:

  • Can you pay the taxes? Estimate how much you'll need to pay in taxes before you do the rollover so you're not hit with a nasty surprise come tax time, and set that money aside. 
  • Do you want to choose your own adventure? If you're confident that you can manage your own retirement funds and you want to do so, rolling over your pension into a Roth IRA can be a good decision. 
  • Are you worried about your pension plan's longevity? It's not uncommon to hear about pension plans running out of money and leaving people high and dry. If you're worried about that, you may be able to guarantee a payout now. 
  • Would you rather have guaranteed payments for life? As long as it doesn't run dry, you'll generally get guaranteed payments for life with your pension plan. You won't get that if you do a rollover into your Roth IRA. 
  • Do you want to avoid taking required minimum distributions (RMDs)? Most retirement plans require you to start making withdrawals when you reach age 72. If you don't want to do that, a Roth IRA, which has no RMDs, can help you get around those limits to keep your savings growing. 

How To Roll Over Pension Funds to a Roth IRA

Rolling over a pension isn't too different from any other type of IRA rollover. Here's how to do it, step-by-step:

  • Make sure you have a Roth IRA: You'll need a place to send the money. If you don't already have an account open, you'll need to open a Roth IRA before you get started. 
  • Initiate the rollover: Ask your plan administrator how to roll over your pension funds. They may be able to do a direct transfer and send it directly to your Roth IRA, or they may issue you a check that you'll need to deposit yourself into your Roth IRA within 60 days. 
  • Check that everything went through: Keep an eye on your funds while the rollover is happening so you know where they are, that they end up in the right place, and that everything is invested in your selections when it gets to your Roth IRA. 

Frequently Asked Questions (FAQs)

How much time do I have to roll over my pension into a Roth IRA?

You'll need to complete the rollover within 60 days from when the money leaves your pension. If you wait longer than that, the IRS might consider it a withdrawal, and you could be charged a 10% early withdrawal penalty if you're under age 59½.

How does a required minimum distribution (RMD) affect a rollover from a pension to a Roth IRA?

Pensions require RMDs, but Roth IRAs do not. If you're receiving pension payouts and you don't need the money, one option is to put them into a Roth IRA to keep growing. This isn't a rollover, and you don't need to do anything special for it—just deposit it into your account, as long as you meet the requirements. 

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