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3 min read

Here are the Rules When Rolling Over Your Pension to an IRA

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Pension plan freezes are occurring with alarming regularity. There is plenty of news coverage regarding pension plan freezes at large blue-chip companies, most notably GE this week.

Approximately 25% of American workers still rely on a pension for their retirement. Though pensions are dwindling, they still play an important part in many people’s ability to retire.

Pension plans have largely been replaced by the 401(k).

Traditionally, pensions are funded by the company and a younger workforce so retirees can live comfortably on distributions. As age demographics shift, and companies and local governments look for ways to cut costs, Americans need to make sure they are still in control of their retirement.

According to a report by Towers Watson and Institutional Investors Forum, 3 out of 4 employers with pension plans reported they are—or are in the process of—unloading pensions obligations. Both Hostess Brands and American Airlines also terminated pension plans.

Pension freezes can be nerve-wracking. A simple solution to keep the tax benefits of an employer's retirement plan is to roll over into an IRA. Also, a Self-Directed 401(k) can potentially increase how hard your money is working for you.

What happens to my pension in the event of liquidation?

While your previous employer is participating in the activity known as “de-risking,” you’re likely to be offered a lump-sum. You will have the option to take the payout and pay taxes or rollover your sum into a new retirement plan.

What to do next to avoid tax on my pension? Can I roll over my pension to an IRA?

Yes! According to IRS publication 575, if faced with a lump-sum distribution, you are able to roll over into a Traditional IRA or 401(k) and face no tax or early withdrawal penalty. For most people, this will be the most attractive option, as the income taxes and early withdrawal fees on a lump-sum distribution will be significant, and not be an option for most people.

How do I choose an IRA provider to maximize investing flexibility?

If you have decided to roll over your pension to an IRA, the next step will be to select an IRA. Pensions with only pre-tax dollars will go to a traditional IRA. When choosing an IRA provider, most people are concerned with investment options and fees. Typical IRA providers have a preset menu of mutual funds which works for some investors. However, a Self-Directed IRA provides options and flexibility desired by others.

When selecting a Self-Directed IRA provider, examine the fee schedule. Fees may be high to open and maintain a Self-Directed IRA. High fees diminish investment returns. It’s crucial to select a provider who is transparent with their fees, fairly priced and offers you the highest degree of freedom within the account to invest in what you want.

At Rocket Dollar, it’s important for us to present an upfront and clear fee schedule. Our fees are $360 to open an account and then $15 monthly.

What are the benefits of a Self-Directed IRA?

If you are considering a Self-Directed IRA, check out this blog post outlining how and when to use a Self-Directed IRA. A Self-Directed IRA can be a great option for people needing to roll over a pension, or any eligible 401(k) for a few reasons.

First, the big IRA providers have limited investment options, and instead funnel you into a predetermined menu of their own funds, meaning that not only you can’t invest in what you want, but they can collect fees on every fund you are able to purchase.

Second, having assets outside of stocks and bonds can increase your ability to withstand a market downturn or recession. A Self-Directed IRA is used to invest in assets such as real estate, startups, peer to peer lending, or anything else allowed by the IRS. You are in control of your portfolio.


Learn more about Self‑Directed retirement plans with our ultimate guide.

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