How to Rollover a Pension

Pension rollovers allow you to change the structure of your current retirement account in order to get a better tax benefit. Not everyone should rollover a pension; this is the best option only for those people who think they can get a better deal with another type of account.

Tax Structure Differences

It is first necessary to quickly understand the different tax structures between the primary pension accounts: 401k, IRA and Roth options. The Roth option is available for both 401k and IRA accounts.

• 401k contributions are made with pre-tax dollars. Then, the funds grow tax free. You have to pay taxes on distributions when you take them later in life. Those distributions are taxed at the rate you are responsible for at the time you get the distribution.
• IRA contributions are made with post-tax dollars. However, the contributions are tax deductible. Then, the funds grow tax free. You are taxed again when you take a distribution.
• Roth options are only taxed once; however, there are much lower limits on Roth options. You contribute post-tax dollars. The funds grow tax free, and they are distributed tax free.

Capitalizing on a Better Tax Structure

To get a better tax structure, you can roll your funds over from your current pension fund into a new form of account. There is no penalty for doing this, but you will need to consider the taxes you may need to pay if you  are switching types of accounts. For example, a Roth option is a post-tax contribution. If you roll over from a 401k to a Roth 401k, you will need to pay taxes on the funds and then they can grow tax free. Roth options are best for individuals currently at a low tax rate who know they will have a higher tax rate in the future. 401k options are best for those who have contribution matches through their employer. IRAs are best for individuals who are setting up their funds independently and want more flexibility than a 401k or RothIRA can offer.

Rolling Over without Penalty

The key to any rollover is assuring you avoid early distribution penalties. Early distribution is any distribution before the minimum age of 59 1/2. The penalty is 10%, which can add up to a lot of money if you are changing over your entire retirement account to another option. In order to avoid this penalty, there are two ways to effectively rollover your structure:

1. Have a pension administrator set up a new account for you prior to taking your funds out of the old account. Then, have the administrator handle the entire process, basically pulling the funds directly from one account and straight into the other. The funds will never touch your hands, and no distribution error is possible.
2. Have the funds from your previous account paid out to you. Then, place those funds into the new account. You have 60 days to complete this transaction. If the funds are not paid in full into the new account within 60 days, then you will face the 10% penalty.

Tags: 401k rollover, can i roll my 401k to a roth ira, ira rollover, pension rollover, roth ira