Pensions are funded by contributions made by an employer and sometimes the employee. They are a tax incentive to the business and a way to grow retirement income tax free until the person leaves the company or retires. A retiree looking to improve their returns either before or after retiring can examine pension transfers.
As with rolling over any tax-deferred savings plan, the IRS has specific rules to follow when converting the funds. Failure to follow these rules can result in the maximum taxation and additional penalties.
Getting Started
Withdrawing cash from an eligible retirement arrangement such as a pension, and moving the funds into another qualified plan can be a tax-deferred event. The amount of the rollover may be all or part of the balance, and most plans are allowed sixty days to complete the conversion. Depending on the arrangement, the required distribution may be waived. In the case of pensions, the RMD is when the participant reaches the age of 70 ½. If the money is converted to a Roth IRA, there is no required minimum distribution age.
To begin a pension transfer, contact the administrator and have them spell out the necessary steps. Depending on the pension plan management company, the employee can either withdraw funds for a conversion; wait until they meet the minimum distribution age, or until they cease to work for their employer. The penalty for pulling out money against these recommendations is taxation of at least 20% plus any applicable early withdrawal fees.
If the employee is eligible, the next step is to decide what type of fund the contribution will be made to. Traditional IRA’s, Roth IRA’s, and other plans each have different advantages and disadvantages which can affect the size of the individual’s portfolio. As a general rule, there are sixty days to move the funds into a new retirement account tax free. Failure to convert on time can result in the aforementioned penalties.
Choosing an Account
The two most common IRS retirement classifications are the traditional and roth ira’s. A person rolling their pension plan into a traditional ira must do so well before the age of 70 ½. At this age they are required to receive payments, and unless the distributions are re-invested, the money will cease to grow. This move makes sense if the person has left the employer but has many years to go before retirement.
Because the money has been accumulating in a tax shelter, transferring a pension into a Roth ira within the sixty day period may still result in a taxable event, but one without penalties. The advantage to the Roth is tax-free withdrawal and no mandated age at which the individual has to begin taking money out. This conversion makes sense for the older worker who is retiring but is not ready to tap their nest egg.
A competent professional can assist in moving funds from one account to another. Obtain all the correct forms and information, and monitor the transfer to ensure no unnecessary penalties are incurred. For retirees, consider hiring a good wealth management adviser to help with future investments, after-death asset allocation, and related tax issues.
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